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Mercy Hospital was founded in 1873 by four Sisters of Mercy who traveled from Davenport, Iowa, by train, carrying as many furnishings and medical supplies as they could manage. They came at the invitation of Dr. W.F. Peck, dean of the young Medical School of the State University of Iowa, who wanted the Sisters to establish a hospital in Iowa City. Such a hospital would provide a facility where medical students could gain clinical experience and the Sisters could pursue their mission of caring for the poor and sick.

When the Sisters arrived at the Iowa City train station, a kindly local farmer offered to take them to their final destination in his wagon. The Sisters were greeted by Dr. Peck and set to work immediately, cleaning and refurbishing the abandoned building at the corner of Iowa Avenue and Gilbert Street. Only three weeks later, on September 27, 1873, the new Mercy Hospital admitted its first patient - a gentleman with tuberculosis.

In 1885, the Sisters purchased a property called the Dostal House, located about three blocks northeast of the first hospital, and moved into it early the next year. The remodeled building, owned by the Sisters of Mercy, offered space for more patients and included a carriage house that was turned into a surgery amphitheater. Mercy Iowa City continues on this site today. The Sisters of Mercy and the Medical School faculty worked together until 1898 when the State Board of Regents appropriated money to build a new hospital for the Medical School. When the University's own hospital was created, the Sisters of Mercy were free to operate their hospital as a community institution.