In 2012, a neighborhood clinic of The Children’s Hospital of Philadelphia (CHOP) in South Philadelphia had outgrown its space and was looking to expand, but in this working class neighborhood of dense row houses, real estate was hard to come by. Meanwhile, the City of Philadelphia operated a health center, a library and a recreation center, in outdated facilities, on a city block of land in the same neighborhood. CHOP approached the city about its need for land, and a partnership emerged.
In 2012, a neighborhood clinic of The Children’s Hospital of Philadelphia (CHOP) in South Philadelphia had outgrown its space and was looking to expand, but in this working class neighborhood of dense row houses, real estate was hard to come by. Meanwhile, the City of Philadelphia operated a health center, a library and a recreation center, in outdated facilities, on a city block of land in the same neighborhood. CHOP approached the city about its need for land, and a partnership emerged. The city would provide the land, CHOP would pull together the construction capital, and together they could build a new, shared facility that would better serve the diverse residents of South Philly.
As the partners brainstormed all of the potential synergies, that’s when it became really exciting.
The new Community Health and Literacy Center, opening in 2016, is a first-of-its-kind hospital-city partnership. The project will include a CHOP pediatric clinic; a full-service community health center run by the city’s Department of Public Health; a branch of the Free Library of Philadelphia; and a modern recreation center with a playground and green space, run by the city’s Department of Parks and Recreation.
The state-of-the-art facility will be energy efficient, will manage storm water with an appealing outdoor “rain garden,” and is pursuing a silver LEED rating. It will offer welcoming outdoor space for the neighborhood and an indoor community meeting space. The location has excellent public transit access, with a subway stop on site. CHOP and the city will integrate services and programming as a way to have more impact to improve population health.
The health center’s waiting rooms will include health literature and computers for patient use; the recreation center will offer programming that supports physical activity recommendations for CHOP and city patients; the health center and clinic will inform patients of offerings like library-led ESL classes; the library will also offer job support through computer training, job search and resume help, and literacy programs for children, including reading circles held in the recreation center. As the partners brainstormed all of these potential synergies, says Peter Grollman, vice president of Government Affairs, Community Relations and Advocacy at CHOP, “that’s when it became really exciting.”
Project Components: Pediatric health clinic, community health center, library, recreation center
Key Stakeholders: The Children’s Hospital of Philadelphia, City of Philadelphia
Financing: The Children’s Hospital of Philadelphia funds, City of Philadelphia funds, New Markets Tax Credit (NMTC) equity and loans, philanthropic and private donations
Project Status: Ground breaking, September 2014; project to open in 2016
Scope: $42.5 million, 1.59 acre, 93,046 sq. ft. 3-story building
In an ambitious two and a half year planning process, CHOP and the City met biweekly, hosting alternately, to build a shared vision for the project, address legal issues, agree on budget and financing, review architectural drawings, and finalize the deal. CHOP explored reporting project construction costs as part of its nonprofit hospital community benefit obligation, and though ultimately was advised against it, nevertheless took responsibility for financing the majority of the construction. (NOTE: Operating losses and depreciation will be reportable as community benefit.) CHOP was able to secure federal New Markets Tax Credits (NMTC) to supplement its own investment and help finance the project. The Center will open in 2016.
For the city, says Philadelphia’s Former Deputy Mayor for Health and Opportunity Susan Kretsge, “[the project] was a confluence of need and opportunity.” CHOP needed to expand, the city saw an opportunity to modernize and update its facilities in a high-need neighborhood, and both were able to bring to the table resources and assets that neither, alone, could muster. CHOP already held population health and “managing people’s health in their communities” as a specific goal, according to Grollman. This became increasingly true in the context of the Affordable Care Act.
The project had high-level champions in both organizations, including Philadelphia’s mayor and CHOP’s CEO, and throughout the sometimes difficult process both partners recognized and were committed to completing what they believed to be a pioneering project. This commitment helped carry the partners through a complex set of negotiations between the two large and multi-layered entities.
City departments involved in the project included Parks and Recreation, Public Health, the Free Library, Public Property, Law, Finance, and Innovation and Technology. Many of these departments had partnered with one another before, one on one, but making decisions together in a multi-department collaboration of this scope was new. The city’s Law department led the initial discussions with CHOP to establish the agreement, with input and approvals from Public Health, Finance, Public Property, Parks and Recreation and the Library.
During design and program planning, CHOP was initially meeting with each department individually, but this was not addressing crosscutting issues. The city appointed Kretsge, then chief of staff to the Deputy Mayor of Health and Opportunity, to “pull us all together and get us moving in the same direction.” She instituted monthly pre-meetings, in advance of the meetings with CHOP, to negotiate internal compromises, arrive at a common agenda, and identify the right decision makers.
For its part, CHOP, with its 50 locations throughout Pennsylvania and New Jersey, had to align its own internal stakeholders. Part of the challenge, says Grollman, is that there was no “playbook” for how a hospital partners with a city on a development project.
CHOP and the city engaged neighborhood residents in the planning process through a series of community meetings. Community residents raised basic practical issues like parking, facility hours and security. But they also wanted to see the center provide things such as community programming that engages young people and seniors, job search and resume support, computer access and training to help bridge the “digital divide,” and community meeting space. These resident ideas informed and are now woven into the plans for the facility and its programming.
Some of the biggest challenges in collaborating were developing a common vision, establishing the legal framework for the collaboration, and negotiating design needs and desires from each partner and each city department while staying within the construction budget.
Every step along the way there was an unexpected layer of complexity.
Whenever it enters into contracts, the City of Philadelphia must comply with the Philadelphia Home Rule Charter and the Philadelphia Code. The legal framework for the collaboration had to be carefully structured and drafted accordingly. This required establishing three distinct contracts: a ground lease (setting the terms for use of the property), a prime lease (the rental agreement for use of the facility) and an operating agreement (establishing the terms by which the joint facility would be operated and managed). The two leases required the approval of the Philadelphia City Council, which passed an ordinance authorizing them.
It was also a challenge to put together the financing to make the project work. To secure NMTCs, the project had to create a non-profit organization, called 1700 South Broad Street, Inc., qualified to receive the NMTC equity and investment. Once the project budget had been established, the partners also still had to talk through differing understandings of what that primary “build” process (and budget) included, and what each partner would need to pay for separately to equip its own parts of the facility.
What kept everyone at the table was the belief that what they would end up with would be “an incredible new building” says Kretsge, as well, says Grollman, as the exciting promise of integrating services and programming in truly innovative ways.
The total project design and construction budget came to approximately $42.5 million, plus the costs for each entity to outfit and equip its own facilities within the complex. Real estate for the project was provided by the City of Philadelphia, a site it already owned. The city transferred the property to the Philadelphia Authority for Industrial Development (PAID), a public authority incorporated by the city to manage its properties, which manages the lease agreements with CHOP on the city’s behalf. The city provided $2.2 million in direct funding for the construction, plus the $2-2.5 million it needs to equip its facilities (health center, library, recreation center). The Free Library secured $500,000 in private donations through its Free Library of Philadelphia Foundation, as well.
CHOP provided the remainder of the $42.5 million, securing $9.8 million in NMTC equity and $30.5 million in NMTC loans. The loans will be repaid from CHOP general operating revenue. To secure NMTC financing, administered as part of the federal Community Development Financial Institutions Fund (CDFI Fund), CHOP worked with a consultant. The consultant joined the hospital’s facilities, real estate and construction management leadership to meet with all potential lenders, tax credit allocatees and Community Development Entities (CDEs) including Commonwealth Cornerstone Group, Ltd. and others, to advocate for investment in this project.
Though CHOP was familiar with NMTCs from an earlier project, the process and requirements were new to the city. The partners had to establish a Qualified Active Low-Income Community Business (the new non-profit 1700 South Broad Street, Inc.) in addition to meeting NMTC requirements for investment in a business in a low-income community. CHOP’s taking on full responsibility for servicing the debt, says Grollman was essential to securing the NMTC loans. In exchange for financing and managing the construction, CHOP will receive a long-term lease from the city, through PAID, at nominal cost.
CHOP explored using a portion of the capital expense of the project to meet its IRS community benefit requirement, but in the end was advised by its consultant that it could not. As one of the 58% of community hospitals that are non-profit, CHOP must file a Schedule H with the Internal Revenue Service each year, demonstrating what it has expended on “community benefit.” Historically, community benefit has been used to cover the cost of care losses, such as charity care to the uninsured and excess costs for Medicaid- and Medicare-reimbursed care.
Some non-profit hospitals and hospital systems have also demonstrated community benefit through community-based programs such as obesity or asthma prevention, or by funding research. But while Schedule H changes instituted as part of the Affordable Care Act state that some community building activities (including physical improvements) may be considered “community health improvement services” eligible as community benefit, precedent is limited and Schedule H instructions remain unclear.
Despite changes to community benefits rules for hospitals as part of the Affordable Care Act, precedent is limited, and instructions remain unclear.
Thus when CHOP sought expert guidance on whether it could claim the capital costs for the project, it was advised against doing so. It can claim community benefit for any losses that may be incurred in CHOP’s operation of its own clinic at the facility, such as from differences between Medicaid reimbursement and the actual cost of a procedure or visit. In addition, CHOP expects to be able to claim depreciation.
Nonetheless, the project fit well with CHOP’s larger population health efforts. It committed to shouldering the majority of the financial responsibility for the project, and payment on the $30.5 million in loans will be covered out of the hospital system’s general revenue.
Critical factors that came together in order for the project to come to fruition included:
- Putting in place the legal framework for the partnership and the project, and finalizing the contracts. A key turning point came just before CHOP’s June 2014 board meeting. All agreements had to be approved by the board. Had the necessary contracts not been finalized by that meeting, CHOP would likely have lost board approval for the entire project and would have had to pull out.
- Developing processes by which these two very large, very complex organizations (the City of Philadelphia and CHOP) could work together while managing their own internal dynamics, negotiating internal compromises, and ensuring the right people were brought into the process at the right times. Regular biweekly, in-person meetings between the two organizations kept the process moving.
- Gaining access to New Markets Tax Credits. Though CHOP was familiar with NMTCs from an earlier project, the process and requirements were new to the City. The partners had to establish a non-profit entity eligible for NMTCs, and CHOP’s financial resources were critical, for the project to qualify and be approved for the NMTC equity and loans.
- Although the initial proposal simply addressed a need for real estate and new facilities, the programming synergies generated excitement that played a key role in maintaining momentum for the project and working through compromises.
MEASUREMENT AND OUTCOMES
Although the partners are very interested in assessing health outcomes from the project, they see some challenges. Most significantly, the new facility is being built at the same time that Pennsylvania is rolling out its Medicaid expansion under the Affordable Care Act. Other construction efforts are also under way in the neighborhood, such as commercial and residential revitalization projects on and around nearby Passyunk Avenue. The measurement challenge will be to tease out the independent effects of these different factors in order to evaluate the outcomes attributable to this project.
The City health department brings to this project an abundance of data on traditional health measures and measures of social determinants of health for its South Planning District, where the project is located. Most of these measures come from the department’s Community Health Assessment, which draws data from multiple local, state, and federal sources, and show that the neighborhood is a high need area. The poverty rate in the area is 24% (citywide average is 22%). Sixteen percent of residents are uninsured and 13% have no regular source of health care. The adult obesity rate is 24%, and 21% for kids. The smoking rate is 27%, and asthma hospitalizations are five times higher than the Healthy People 2010 goal. The neighborhood data helped highlight the importance of the opportunity presented by CHOP’s proposal to partner on a new facility.