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Health Care and Opportunity Zones: The Game Begins

Below is the Nowak Metro Finance Lab Newsletter shared biweekly by Bruce Katz.

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February 19, 2019

(co-authored with Evan Weiss and Ken Gross)

The Opportunity Zone incentive is a new community investment tool established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income communities. The Act creates a tax incentive for investors to re-invest their capital gains into dedicated Qualified Opportunity Funds (“QOF”). Of the 8,762 census tracts across the county that have been designated as Opportunity Zones, 2,905 (33%) either contain a hospital or are ½ a mile from a hospital. While much of the early attention given to Opportunity Zone investing has focused on many of the “usual suspect” cities, hospitals and healthcare systems are a unique institution in that they’re represented in almost every kind of community—serving big city neighborhoods, mid-sized cities, small towns, and rural areas. Hospitals can play a leading role in efforts to attract, organize, and even make QOF investments in the communities that they serve.

Hospitals and healthcare systems are anchor institutions with the potential to make communities healthier by leveraging their stature and resources. Hospitals and healthcare systems are typically the largest employers in their communities and have assets that go far beyond their clinical offerings, such as deep community relationships, existing community health outreach programs, significant property holdings, and expertise in real estate and finance. All of these can collectively be leveraged to benefit both the community at large and the hospitals themselves, often through the same projects.

Hospitals have a financial imperative to improve community health. Healthcare is moving from a fee-for-service payment model to accountable care models (ACO). Under the ACO model, an organization is reimbursed for each patient under its program, not for each service it delivers. This is changing the way that hospitals think about delivering care. They are now incentivized to find ways to improve and maintain the health of the population at large, rather than just treating acute issues as they arise. In response, hospitals are looking for ways to invest in care outside of the hospital that will result in the reduction in the use of care within the hospital. This model creates a win-win: hospitals receive the financial benefit of reduced utilization of health care service while the health of the community improves.

While many of these population health investments have focused on community based clinical programs, such as nurse home visitation care management programs (“downstream interventions”), some have begun focusing on addressing social factors influencing the health of the community (“upstream interventions”). Here are a few examples of hospitals leading social impact investment:

Kaiser Permanente created a $200 million Thriving Communities Fund to address housing stability and homelessness in eight states. 

ProMedica health system in Akron, Ohio partnered with the Local Initiatives Support Corporation (LISC) to create a $45 million fund for community revitalization efforts. One of their first investments was a grocery store in an area of the community that had been labeled a “food desert”.

Johns Hopkins partnered with Walgreens to place a “Well Experience” store near the hospital bringing new health and wellness services to the community.

Dignity Health System provides loans, guarantees, and lines of credit at or below market rate to nonprofit borrowers. The investment program has had a total loan volume of $164 million resulting in affordable housing, assisted living, shelters for the homeless discharged from the hospital and access to capital for more than 55 small businesses.

While these examples show what is possible, hospitals attracting and leveraging their substantial investment capital to address community needs—many of which will help them meet their own—remains a largely untapped opportunity. Accessing capital to invest in community projects remains one of the barriers hospitals face in leading community intervention efforts at scale. This is where Opportunity Zones come in. Opportunity Zones incentivize investments in low income areas, creating an atypical investment environment as the opportunities are often not among those traditional projects investors are likely to find on their own. Communities need to carefully prioritize their needs and strongly market their investment opportunities. Hospitals and healthcare systems should facilitate this process in their communities. Here are three steps that hospitals should take:

Develop a community health investment prospectus: It is easiest to work backwards from the needs and goals of a healthcare anchor and the community rather than trying to consider what a QOF might be able to invest in (whether directly or indirectly “sponsored” by the anchor). Therefore, the healthcare anchor and the community should co-develop a community health investment prospectus highlighting specific investments needed in order to improve the health of the community, present the resources and the strengths of the community, the existing capital available, and the additional capital needed. Each project should include the planned sources of funding; this will allow analysts to determine whether a QOF offers a potentially cheaper source of capital or other preferential element (e.g., greater return potential from a venture-type QOF operating business investment). The prospectus makes the case to investors on why and how they should make an Opportunity Zone investment in a community. Hospitals should take the lead in the prospectus development or ensure that the prospectus reflects community health priorities, all while working to ensure that the stakeholder community is bought into investment opportunities.

Develop capital stacks to support the investment prospectus: QOFs will very likely provide necessary but not sufficient capital for projects. But one of the unique features of Opportunity Zone capital is that it can be combined with basically any other type of capital—from the health system itself, other for-profit investments, mission-driven capital, public subsidies, and philanthropic grants. Healthcare systems may consider forming their own QOFs through their endowments, pensions, or other investments and trusts. Most healthcare systems and hospitals are non-profits and maintain tax exempt investment funds; while they can’t typically gain any tax benefits from investing in a QOF, there is nothing prohibiting a healthcare system from doing do. A healthcare system’s investment would provide incentives to other investors on the fence about investing in a QOF project by de-risking it through offering a “match” or even an unfunded loan guarantee, the latter of which can be a highly efficient and sometimes more appropriate way to “deploy” endowment/trust capital. Rather than traditional grants to a community-supported cause, these investments can generate a return financially and socially by aligning a healthcare system’s investment with its own mission and needs. For any for-profit element of a healthcare system, they should consider using their own corporate (or shareholders’) capital gains to invest in business expansion, development, and community health needs. Healthcare systems could also encourage their employees, who can benefit from the tax incentive, to invest in an anchor-sponsored QOF through a matching program.

Serve as a Local Clearinghouse of Strong Investments, Helping External Investors:A challenge of the Opportunity Zone incentive is that it focuses on distressed areas that have not had a great deal of market exposure. Since many anchors have the resources and local knowledge to identify businesses and pieces of property that would benefit investors in Opportunity Zones, they can give external investors greater confidence by providing a “seal of approval” for investment based on their own due diligence. Healthcare systems can also direct potential investors towards areas aligned with their missions. Smaller communities, financially distressed cities, and regions of dispersed Opportunity Zones might look to local anchors to serve as a clearinghouse for investors and investments, particularly since hospitals are often able to run successful businesses in distressed census tracts.

Most universities and healthcare systems maintain broad structured networks of potential high-quality investors and businesses from their boards, donors, and alumni that might not otherwise be engaged. Healthcare systems should connect with alumni and board members who are investors or have businesses of their own with capital gains and facilitate “alum to alum” investments or similar deals in identified QOFs that seek to advance healthcare system initiatives. While much of this could be possible without opening a QOF, doing so would allow the anchor to control its own investment strategy and who it brings in to deals.

The evolution of Opportunity Zones is still in its initial phase. As the Opportunity Zone game begins, the potential for knitting together health care, hospitals and community regeneration seems large. We look forward to hearing from anchor institutions, local businesses, philanthropies, investors and others on the creative ways to help this tax incentive advance the goal of healthy communities. If you want to get your hospital or healthcare system involved or have already been working on creative Opportunity Zone solutions, send us an email at

Ken Gross is the Founder and Principal of Quantitative Innovations. He previously served as a Senior Associate at The Reinvestment Fund, the Philadelphia-based community development finance institution founded by Jeremy Nowak, and as Research Director at the Camden Coalition of Healthcare Providers.

Evan Weiss is Director of PEL Analytics, a 501(c)(3) research and advisory firm that develops and fully implements financial recovery and economic development strategies for government and non-profits. He previously served as Budget and Administration Advisor in the Office of Newark Mayor Cory Booker.

Bruce Katz is the inaugural director of the Nowak Metro Finance Lab at Drexel University and the co-author (with Jeremy Nowak) of The New Localism: How Cities Can Thrive in the Age of Populism.