This article appears in the January/February 2013 issue of HealthLeaders magazine.
As healthcare CFOs devise plans to counteract thinning reimbursements and diminishing margins, many are finding that energy-efficiency choices are helping to help solidify long-term, sustainable cost reductions.
"It does cost a bit more now to be energy efficient if you compare energy prices today to the cost of making the changes. But if you're a betting person you know that the energy prices will go up. So spending more today is a hedge against the future prices," says Mike McDevitt, executive vice president for facilities and technology at the Birmingham, Ala.-based Children's of Alabama, which constructed a 12-story hospital employing numerous energy-conservation strategies.
Healthcare organizations spend nearly $8.8 billion on energy each year to meet patient needs, according to the Environmental Protection Agency. Moreover, the quadrennial 2007 commercial buildings energy consumption survey by the U.S. Energy Information Administration shows that major fuels—including electricity, natural gas, fuel oil, and district heat—used by large hospitals (those greater than 200,000 square feet) account for 458 trillion BTUs of energy, accounting for 5.5% of the total delivered energy used by the commercial sector.
Both the energy and healthcare communities largely attribute this massive consumption of energy to the number of aging hospitals and health systems along with the general nature of how these organizations must operate—continuous operating hours and thousands of patients, visitors, and employees consuming energy all day, every day of the year. With an eye on potential savings in energy and money, some healthcare organizations are reassessing how they construct new facilities and looking for ways to modify their existing operations with minimum capital outlay.
Environmentally conscious expansion
In August 2012, Children's of Alabama completed the transition into its new $400 million expanded facility—the Benjamin Russell Hospital for Children. The project was the culmination of three years of work, resulted in a total of 332 beds and 48 NICU bassinets, and placed Children's of Alabama in the top 10 pediatric medical centers based on bed count. Currently the organization has an application pending for Leadership in Energy and Environmental Design certification. If it receives it, that would make the organization the first hospital in that state under LEED version 2.2 for new construction.
"This hospital cost us a little more to build, but it's going to get us a return thanks to our energy-saving strategies—some of those [returns] will be quick and some of them will be over the life of the building," says McDevitt, who oversaw the hospital's green design and construction. Pursuing a LEED design and approach cost the project approximately $2 million-$3 million more than taking a traditional design approach; however, McDevitt notes that a philanthropic contribution for that amount was given and earmarked for Children's to use to pursue LEED.
Bolstered by the knowledge that taking a green approach wouldn't cost the organization more than a traditional one, the organization pressed forward with its plans. McDevitt says its other facilities had already attained a lot of its operational low-hanging fruit, so when it looked to build another facility, it wanted to optimize any and all opportunities for efficiency.
"The CFO and I came up with an internal rate of return for selecting our energy conservation projects," he explains. "I asked our CFO, 'What should we expect to get as internal rate of return?' He looked at the potential savings for each project that we proposed and determined that if we got a 6%-7% rate of return on every dollar over and above our normal operations over 10-12 years, that would be reasonable. So that was our objective, and the directive I gave to the designers was to look for projects that offered the biggest bang for the buck."
Designers concentrated on using energy-efficient and environmentally responsible materials, says McDevitt, such as recycled mirrors and seashells in the terrazzo floor of the hospital. It also used local materials wherever possible, selected recycled raw materials for construction, and recycled 30%–40% of its construction project waste materials to help reduce the environmental footprint of the project.
Even the orientation of the building was factored into its ability to conserve energy. The building uses a north-south orientation that, when paired with the structure's large glass windows, allows plenty of natural light into the building, increasing warmth and light for the facility.
Also, 30% more energy-efficient mechanical systems were installed and an innovative heating and cooling system was added. The hospital's heating and cooling mechanism collects 30,000 gallons of condensation from its air conditioning system and recycles it for irrigation and to cool equipment. The facility also uses a rooftop garden with native sedum to provide insulation and oxygenation for the building. The design is energy efficient, requires less maintenance, and provides long-term cost savings.
"Typically our existing plant [of 700,000 square feet] costs us $3 million per year; this new plant is large at 700,000 square feet of space and is using 20% less energy," says McDevitt. The new facility is so efficient that the older structure is now getting much of its heating and cooling energy from the new one. "Because of our green projects we have a raw energy cost savings of 25% in our overall campus. This has really been a big win for us."
The project succeeded on an environmental level and a financial one, McDevitt says. The internal rate of return for many of the projects selected far exceeded the 6%-7% rate of return over and above operations that the organization was aiming for, hitting rates of return of as much as 20%-30%.
Sunny bottom line
While Children's of Alabama expects to see long-term returns for its energy investment, it still needs to use some of its own capital spending budget to help develop its building. However, at other organizations, getting healthcare leaders to consider energy conservation projects in lieu of clinical projects can be a challenging discussion. Finding a creative way to finance the energy conservation pursuits can eliminate the discussion and free up capital dollars for other efforts.
"Hospitals need to invest in medical equipment so when capital is allocated, that's usually where it goes," says Robert Mulcahy, vice president of facilities and environment of care at Saint Peter's University Hospital in New Brunswick, N.J. "There never seems to be enough money to invest into these green projects as aggressively as we need to."
However, Mulcahy knew there could be real financial savings in energy reductions for his 478-licensed-bed hospital if the $448 million net revenue organization could find a way to make the capital investment. With a tight capital budget, though, the organization had no intention of pursuing an energy conservation operations project—that is, until PSE&G, a Newark, NJ-based utility company offered a program that when combined with a federal grant would underwrite 90% of a $9 million solar-panel project and cost Saint Peter's just $1 million in capital dollars to complete.
"The only reason we even looked at this program was to hedge on future energy prices because we have a great utility rate," says Garrick Stoldt, vice president and CFO for Saint Peter's. "Frankly, I was really skeptical at first of the PSE&G pitch, as I've seen a lot of utility companies say they have a great program and it turns out to be a loan. But once the utility company walked through all the pieces of this program, I realized doing it was a no-brainer."
Saint Peter's funded 30% of the project though a federal grant and another 60% of the funds came from a 15-year, 11% interest loan paid through tax credits that was part of the PSE&G solar loan program. The loan program works by covering 40%–60% of the cost of a system with the remainder being financed separately by the customer. The actual maximum loan amount is based on how much energy the recipient's system is potentially expected to produce over the term of the loan.
The loan recipient can repay the loan through cash payments or by signing its Solar Renewable Energy Certificates over to PSE&G—which is the option that Saint Peter's selected. An SREC is a unit of power and is equivalent to one megawatt-hour of solar electric generation under the state's trading system.
For the nonprofit Saint Peter's to participate in this loan program, in which it was selling power from its solar panels back to PSE&G to repay the loan, it had to create a for-profit energy entity. Fortunately, the organization had a defunct but taxable durable medical equipment company on the books, which it repurposed to pursue this path. Also, under state law, as an energy provider, Saint Peter's is required to sell its SRECs back to its main supplier, PSE&G, which is how the loan is repaid. The value of an SREC can vary according to market conditions; Saint Peter's SRECs are currently valued at $350 each as part of the contractual agreement with the loan.
"So assuming that price is never greater than $350 per SREC, that loan will be 100% paid off, including tax credits, in 15 years," explains Stoldt.
Thanks to the PSE&G loan program and the federal grant, Saint Peter's has installed 10,000 solar panels on four of its buildings and two large parking lots. The solar panel system generates 2.3 million kilowatts of electricity, enough energy to power an estimated 230 homes. More important, the panels produce enough power to provide 100% of the daytime electricity for its nursing home and 30% of the power for the hospital.
In addition to adding solar power, Saint Peter's also looked to reduce its carbon footprint in other ways. It took advantage of a public utility-sponsored, free energy audit and uncovered other projects that could reduce its cost over three to five years. The organization decided to make another $4.8 million in energy-saving upgrades. To cover these costs, it tapped a Board of Public Utilities of New Jersey hospital efficiency program that includes a grant that pays for 75% of the upgrades, as well as a 25% interest-free loan (repaid through its utility bill).
The funds allowed the organization to add light sensors to reduce electricity use, replace water chillers and piping to make the air conditioning system more efficient, and add high-efficiency burners on the boilers to reduce pollution and reliance on oil. Just replacing the boiler burners and other energy programs saved the organization more than $500,000 in energy costs in one year, and it renegotiated its commodity rate to save another $300,000, explains Mulcahy. All told, these efforts produced $1.6 million in savings in just 18 months.
With the grant covering the majority of the costs, the BPU loan needed to cover up-front costs of approximately $1 million for Saint Peter's. The loan's terms were generous, with three years of payments out via the hospital's energy bills. So as long as the project reached savings equal to its initial costs within the nine years, then the hospital wouldn't need to outlay any up-front capital and would see positive cash flow by the ninth year if not sooner.
At Saint Peter's, the loan repayment took just three years, explain Mulcahy and Stoldt. "We had a million dollars of costs spread over three years, and we had over a million dollar of savings in the first year, so it was positive cash flow for us practically out of the gate," says Stoldt. "With both of these energy saving mechanisms in place, we're actively practicing cost avoidance."
Power-save = powerful savings
Moving toward energy efficiency doesn't require expansive or expensive projects; indeed, simple solutions can bring significant savings. Boston-based Partners HealthCare implemented a personal computer power-management plan that's saving the organization $1.5 million annually, says Manuela Stoyanov, corporate manager of client infrastructure design for Partners. With an expansive network including eight hospitals, more than 5,000 practicing physicians, and 170,000 admissions annually, Partners uses more than 30,000 PCs in its power-save program.
With that many pieces of equipment of varying age and energy efficiency levels, Partners HealthCare needed to find a way to ensure that PCs were turned on only when in use, but finding the right software wasn't simple. It took Stoyanov and an intern a year of research to find a software program that would suit its needs, six months to install and test it, and then years to do an organizationwide phased roll out. In place for the past six years, the initiative is continuing to produce millions of dollars in energy savings.
Partners' power-save project started as an effort to address a problem the organization was having with power-save settings on its laptops. Stoyanov explains that while researching and testing solutions for its laptops, the organization decided to do an enterprisewide energy analysis of its desktops and laptops. As each hospital in the network had its own utility manager, centralizing and sifting through data was assigned to their intern.
"It was difficult to get the data together. Finding out who had the data was the first part of the process; then we needed to collect the correct electricity usage data from everyone, and then extract the specific information associated with the computers," says Stoyanov. Once they had the numbers, Stoyanov needed to estimate the potential financial savings for pursuing this project. "That was hard to do because some of the monitors were bulky and old and others were new and more energy efficient. We decided that until we found a power-save solution, we couldn't get at a real number of what the savings per PC and per monitor would be."
The biggest challenge in the project became finding software that would work with the hospital network's unique needs, she says. A free power-save program it had initially tested didn't offer enough flexibility; it needed to allow IT to dictate which pieces of equipment would go into power-save mode and when.
"In clinical areas we needed the computers on 24/7, but in the offices where they leave at night we wanted those in stand-by mode. But we also needed the computers to come on for routine maintenance operations during the nights or on weekends and then go back to sleep. The freeware and other programs we researched didn't allow us to categorize our computers this way."
The solution Partners landed on was Verdiem Surveyor, a product that cost them less to purchase than the first year of savings from installing it, Stoyanov notes. To test it, Stoyanov and a small team established a pilot in the main IT hub using 20 computers. NStar, the local utility company, caught wind of Partners' power-save pilot program and also wanted to see the kind of results the organization would have.
"NStar got in touch with us to see if we were really saving power," says Stoyanov. "They came in and put a wattmeter on each of the 20 computers used in the pilot. So NStar was observing and recording these computers' power usage every morning. It turned out to be a successful experiment because NStar confirmed our energy saving data."
By NStar's calculations, the changes the organization made saved $50-$60 per PC per year in electricity: When installed on the majority of the 30,000 units at Partners that translates into over $1.5 million in savings. Additionally, the organization's energy savings earned it a $200,000 energy rebate from NStar.
"The savings and the rebate more than paid for the software," Stoyanov says. "At the very beginning we didn't know how much we'd save—we just couldn't calculate it. Once we got the data from NStar we knew the more computers and devices we could get onto the program the larger our savings would be, and that made selling the project to leadership easy."
With only so many capital dollars available to pursue an organization's objectives, often clinical projects take precedence over operational ones, and researching and investing in energy conservation may get pushed to the back burner. However, the hospitals and health systems that do opt to make energy-saving upgrades, be it through capital budget allocations, philanthropic donations, grants, or loans, are finding there's an environmental and financial return that make these efforts a smart decision.
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This article appears in the January/February 2013 issue of HealthLeaders magazine.
Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
