Conserve Energy to Preserve Margin
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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."
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