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How Six Energy-Related Actions Can Improve a Hospital’s Bottom Line

by Jim Christie, Business Development Manager
October 28, 2014
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Healthcare reform is requiring hospital executives and facility managers throughout the nation to face new challenges. They must focus on new and innovative ways to unlock trapped capital and lower operating costs while still delivering quality care and a favorable patient experience. Healthcare administrative teams are currently evaluating productivity management, supply costs, potential savings from clinical integration, general operating expenses, and now, energy consumption as a relatively new executive suite initiative. Here are six actions that can have a dramatic impact on a hospital’s bottom line:

1. Define Energy Use as a Strategic, Executive Suite Issue

Even though facility managers have focused on energy use, hospital executives have not made it a priority. So why are executives starting to pay attention to energy? First, cost containment is a top priority in an age of healthcare reform. Every stone must be overturned. Second, energy prices are on the rise. Globally, energy dependence creates uncertainty and energy costs are expected to continue to increase by as much as 40% over the next several years. Third, hospital facilities are energy intensive, but that energy use is both measurable and controllable. And finally, energy savings can be significant, freeing up much-needed capital. Therefore, energy is appropriate as a strategic executive-level initiative that can provide a high yield, low-risk way to support a hospital’s bottom line and financial health.

A critical prerequisite to a sustainable energy program is senior leadership support. Hospital executives don’t need to be involved "in the weeds" of developing the program, but they must sponsor the energy initiative, be vigilant with an energy focus and direction, and prioritize energy and Indoor Environmental Quality (IEQ) initiatives. Healthcare executives can benefit from an internal energy specialist whose mission and focus is efficient energy use with IEQ standards, and how these dynamics work together with assigned accountability for performance results.

2. Consider Energy as a High Yield, Low-Risk Service Line

Energy savings should be viewed as an ongoing, high yield, low-risk revenue stream that does not require patient services in the traditional sense, in order to provide income to the bottom line of the hospital.

Hospitals spend an estimated 2-5% of their operating budget on energy or roughly 15% of their profit margin. Consider that for a hospital achieving a 4% net margin, it takes $25 worth of services (gross revenue) to generate $1 of profit/net operating income (25 to 1 ratio). Therefore, in order to accrue $400,000 of net operating income, $10 million worth of services would need to be delivered. Thinking of energy consumption as a distinct service line of its own, energy efficiency initiatives can very well achieve $400,000 or more to the bottom line (1 to 1 ratio) in annual savings.

3. Consider Combined Heat and Power (CHP) Technology to Generate Electricity

Electricity prices are predicted to skyrocket in the near future.  Additionally, because of oil fracking, natural gas prices are stabilizing, if not declining. That’s why CHP has become an exciting alternative for producing hospital electricity, on-site. If a hospital is paying more than $0.06/kWh, there is a good chance CHP will begin paying for itself from day one, delivering substantial savings to the bottom line. There can also be additional savings through utilizing the heat from the CHP system for domestic hot water and reheat needs. Even better, CHP can be a critical component to Disaster Recovery Plans and can run non-critical components like air handling units, chillers, and lighting.

4. Plan for Sustainable Energy Savings

Hospital renovations—especially critical space/surgical suite renovations—can and should be designed considering the use of energy. It’s estimated that less than 5% of hospital surgery suites in the U.S. use automated “set-backs” to deliver substantial energy savings. It’s important to have long-term energy goals so that these savings are being compounded or increased each year. Energy savings goals should equip the hospital CFO with a new marker every year. Ongoing reductions in operating expenses can and should be "the new frontier" to reducing overhead, improving financial performance in a time when other margins generated from revenues are declining. Comprehensive energy initiatives can certainly support that objective.

5. Consider Integrated Design and Delivery for Renovation Projects

A hospital should select a firm with a core competency for producing high-performance buildings. One that owns their design and energy performance guarantees with a long-term partnership commitment through a single-source contract accountability. Recently, one hospital CEO stated that he has never been totally happy with any of the facility projects where he was involved. He either had issues with how the construction went or had major warranty issues after completion.  Given his and other, similar reactions, that hospitals continue down the same design-bid-build road with no guarantees, no commitments around a “no change order” policy, and have no long-term “skin-in-the-game” accountability from the firms who made the design and install commitments on the front end. It’s important to find a partner who will take complete ownership of the project and has engineering, controls, and project management on the same team. This drives communication and ownership of the project.

6. Evaluate Potential Energy Partners based on Performance Guarantees

It is very important to work with an energy company whose entire existence revolves around improving the patient and staff experience through their focus on energy efficiency and IEQ. This company should not only have a talented group of energy and design engineers; it should be able to perform “custom” building automation and control system operations through their own control team experts. Ongoing performance assurance measurement and verification functions are also a must. They should be vendor-independent so that they have the ability to support multiple building automation platforms and should recommend the best solution to reduce energy and improve IEQ. 

Look for a company who is willing to come into your facility and deliver a multi-tiered, energy efficiency strategy that includes guaranteed, “budget-neutral” options. An energy company must be willing to guarantee the energy savings and IEQ and be willing to back it up by working with administration, facilities, and other team members through continuous monitoring and performance assurance reporting after the project is complete. It’s essential to partner with a firm who can work collaboratively to design a long-term strategy for reducing energy and assuring indoor air quality standards. 


About the Author

 

Jim Christie

Jim Christie joined Performance Services in 2011 bringing with him more than 22 years of service with GE Healthcare. Jim held various positions with increasing responsibility including Diagnostic Imaging Sales Rep, Six Sigma Sales Black Belt, Region Sales Manager, Strategic Account Executive and Customer Champion.

Jim Christie

business development manager

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