How Energy Efficiency Ensures

Financial Health for Hospitals

October 2010 / White Paper

Make the most of your energy SM

Summary

Executive summary............................................................................................3

Energy costs and usage are only going up..........................................................4

Traditional cost-cutting measures vs. energy efficiency initiatives.........................5

The overlooked alternative: Improve energy efficiency.........................................6

Measurable, sustainable benefits........................................................................7

Choosing an integrated energy management solution.........................................8

Conclusion.........................................................................................................10
 White Paper

Executive summary

Over the last decade, hospitals around the world have faced increasing
financial challenges as margins and profitability have decreased. Both private
and public healthcare system administrators are challenged with similar
budgetary constraints: The recent global recession has led to losses for
many for-profit hospitals and has squeezed margins in others. Add to that the
staggering statistic that by the year 2050, the world population aged over 60
years will nearly triple from 700 million to 2 billion1 leading to an increase in the
number of potential patients hospitals will need to serve. Yet it is unlikely that
governments will take on additional debt or raise taxes significantly to pay for
this change.

How will healthcare systems handle this increasing financial pressure?

Hospitals must find a way to do more with less. Energy efficiency projects can
unlock trapped capital that can improve a hospital’s profit margin or be used
to fund technological advancements, purchase medical equipment, or improve
the patient experience.

This white paper will discuss how hospitals can gain energy efficiencies and
translate these savings into significantly improved financial performance. To
begin, we will look at trends in healthcare energy usage as well as recent and
predicted changes in energy costs. Next, we will compare traditional cost-
saving measures to energy efficiency projects, and illustrate how improving
energy efficiency can lead to healthy financial performance and improved
patient safety. This paper also discusses various specific energy efficiency
solutions and considerations to take into account when choosing an energy
management service provider. In conclusion, we will look at examples of
hospital energy efficiency projects that have delivered significant results in
terms of cost savings and patient-centric improvements.

1
World Population Aging, 2009. United Nations, Department of Economic and Social Affairs. New York. 2009.
Energy Efficiency Projects Ensure Healthy Financial Performance for Healthcare Facilities | 3
 White Paper

Energy costs and usage are only

going up
In addition to population increases and a struggling
world economy, energy costs have increased by
Energy price, pence/kWh
approximately 20 percent since 1995 and are .25 Profit margin, % 400
expected to continue to increase, by as much Energy intensity, use/sq. m.
as 25 percent over the next five years2 (Figures 1 0.2
300

KWh/sq. m.
and 2). Energy use in the healthcare market has

Price %
increased 36 percent since 1995, due to changes
in technology and data centre requirements, as well 200
as an increase in patients. .01

Global warming and the international drive to 0.05 100

reduce CO2 emissions have caused hospital
executive staff and facility managers to focus new 0
efforts on reducing hospital energy usage. For the 1995 1997 1999 2001 2003 2005 2007 2015 2025
healthcare market, energy efficiency projects are Year

always linked to improving financial performance,

Figure 1. Healthcare Energy Trends (Europe)
either through increased profitability or easing
budgetary constraints. However, as the second-
highest energy-intensive industry, healthcare also
has a significant opportunity to positively impact the Energy price, pence/kWh 400
.25
Profit margin, %
environment through sustainable actions and goals,
Energy intensity, use/sq. ft.
as well as meet new and future energy legislation. 0.2 300

KWh/sq. ft.
0.15
200
Price %

.01

100
0.05

0 0

1995 1997 1999 2001 2003 2005 2007 2015 2025

Year

Figure 2. Healthcare Energy Trends (US)

2,3
Department of Energy, US Energy Information Administration (EIA) Commercial Buildings Energy Consumption Survey
Energy Efficiency Projects Ensure Healthy Financial Performance for Healthcare Facilities | 4
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Traditional cost-cutting measures

vs. energy efficiency initiatives
As stated previously, energy use in the healthcare especially as the economy begins to improve.
market has increased by 36 percent since 1995.
• Remove services: Sometimes hospitals choose
Despite this increase, energy efficiency initiatives
to no longer offer specific services, such as end-
have historically been overlooked as an option to
of-life care or nonmedical procedures. Due to the
reduce costs. Hospital administrators and chief
poor economic climate that prevailed throughout
financial officers (CFOs) have typically focused on
2009, hospitals have most likely exhausted this
implementing new technologies, reducing staff
option. Making additional cuts could jeopardize
numbers, and improving processes to reduce
patient care and customer service.
costs. In fact, in a recent survey of hospital CFOs,
Hospital administrators should be armed with
decreasing utility costs was not even mentioned
the knowledge that if energy costs increase by
as a way to cut expenses.4 And therein lies the
25 percent over the next five years as predicted,
disconnect.
the average hospital profitability could decrease
Increased energy costs are consuming profits by up to 0.5 percent. This reduction is significant
that could be reinvested to aid a hospital’s growth when you consider that the average hospital has
and support patient-centric projects. By investing a profitability of only 3.3percent.7 That translates
in energy efficiency projects now, hospitals can to approximately 1/6 of a hospital’s profits lost
reduce ongoing operating costs and reinvest due to increased energy prices alone. The figure
their savings to purchase new equipment and below shows the financial impact for a fictitious,
technologies. Hospital campuses could be average 235-bed hospital. This analysis assumes
expanded with a new wing or outpatient centre. that the hospital spends €2.39049 million on
New community care initiatives, such as specialty energy/utilities – a number based on the average
clinics for diabetes care or geriatric medicine, could energy spending by hospitals in the U.S (Figure
be launched to address the aging population’s 3). This amount varies slightly in Europe and from
medical needs. hospital to hospital, and depends partly on the
climate zone and current energy efficiency, as well
Why is energy being overlooked? Because
as the hospital’s energy intensity (i.e. the number of
energy costs typically represent only 2–5 percent
operating theatres and types of technology used).
of a hospital’s total operating budget5, hospital
management focused on traditional cost-cutting
measures, such as: Current financial If utility costs
performance rise 25%

• Reducing staff numbers and/or staff benefits: (,000) (,000)

This option could potentially make a nursing Total operating 159,259 159,259
shortage even more critical and lead to an increase revenue
in the risk of medical errors. Lower staffing levels
Total operating 154,066 155,029
have been linked to higher numbers of adverse
expenses
outcomes, such as urinary tract infections,
pneumonia, shock, and failure to rescue.6 Income (loss) from 5,193 4,230
operations
• Renegotiating with suppliers: Although
renegotiating pricing with suppliers may improve Margin 3.3% 2.7%

the bottom line for one to two years, it is difficult

to sustain such savings over the long term, Figure 3. Financial impact of 25% rise in utility costs

4
Based on average hospital data from the “Hospital Financial Management Association”.
5
Students and Directors, EHESP School, Advanced Studies in Public Health. Intermedica Hospital Expo, 2008.
6
Stanton MW, Rutherford MK. Hospital nurse staffing and quality of care. Rockville (MD): Agency for Healthcare Research and Quality; 2004.
Research in Action Issue 14. AHRQ Pub. No. 04-0029.
7
Based on average hospital data from the “Hospital Financial Management Association”.
Energy Efficiency Projects Ensure Healthy Financial Performance for Healthcare Facilities | 5
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The overlooked alternative:

Improve energy efficiency
In contrast to other cost-cutting approaches, information and energy usage can be quickly
energy efficiency can be achieved through viewed and filtered by hospital section, utility, time,
professional services and equipment rather than day, or any other number of variables. As a result,
process changes that affect the behaviour of this real-time information enables facility managers
hospital staff or the level of patient care. to quickly alter usage and achieve results with
low risk to patient care, staff productivity, and
Perhaps the most important benefit of an energy
customer service.
management solution is that energy efficiency
is directly measurable. In order to monitor and A 30% savings in energy costs has the potential to
improve energy efficiency, CFOs and facility improve profitability by up to 1 percent. That can
managers need insight into real-time energy translate to a savings of nearly €908,115.38 in 28
usage in their hospital. An automated building patient days for a typical 235-bed hospital with a
management system can gather, centralize, and 59.8 percent maintained bed occupancy (Figure
analyze energy usage and history throughout the 4), thus proving the case that reducing energy
hospital and displays that information in what is costs can have a significant and positive impact on
often called an ‘energy dashboard’, where building hospital financial performance.

Cost per patient

per day Total

Current utility costs 56 287 913

(2.5% OpEx)

Utility costs with 25% cost 70 359 817

10% 7 35 974 Trapped savings that

could be re-invested
20% 14 71 947
or used to directly
30% 21 107 907 improve the bottom
line
Patient days = 5146

Figure 4. Financial impact of energy efficiency savings

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Measurable, sustainable benefits

So where does that 30% savings come from? projects, including building upgrades, HVAC
Energy efficiency solutions can be scaled to an improvements, lighting retrofit, building envelope
entry-level, medium, or advanced investment, improvements, and application of innovative
depending on the hospital’s needs and evolving energy-saving measures.
energy goals. Each level offers increasing
savings opportunities. Within the comprehensive option, publicly funded
entities can make energy efficiency improvements
• Entry – A small investment with a typical
over a longer payback period. Since publicly
payback in less than two years reduces energy
funded hospitals may not have money in their
use up to 10 percent. Projects typically include
budgets to pay for large projects, a third party
building optimization, utility rate reviews, and
finances the improvements based upon forecasted
variable speed drives. Typical project costs
and guaranteed energy savings. Third-party
range from €12,575.24 to €31,437.47.
financing may be available for projects that cost
• Advanced – A medium investment with a between €628,735.85 and €31,436,828.83.
typical payback in two to five years reduces
The graph below shows that energy services
energy use up to 20 percent. This approach
are one of the best investments a hospital can
includes advanced building recommissioning,
make (Figure 5). An investment in saving energy
HVAC optimization, and lighting retrofits.
offers an internal rate of return of 15 to 25
Typical project costs range from €62,873.59 to
percent, and yet the risk is not much more than
€628,735.85.
a government bond. Most important, by making
• Comprehensive – Aggressive investment electromechanical systems much more efficient
and third-party financing with an extended and optimized, hospitals can take this bold, cost-
payback period reduces energy use up to 30%. reducing step without adversely impacting patient
Self Funding CR – Basic
safetyPrinciples
This approach requires comprehensive energy
or the quality of care.

Direct Direct
effect effect

Reactive
maintenance

Planned
maintenance
Savings

Utility

Today Under Final

guarantee

Figure 5. Impact of self-funded, comprehensive energy solutions

Energy Efficiency Projects Ensure Healthy Financial Performance for Healthcare Facilities | 7
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Choosing an integrated energy

management solution
• Energy forecasting and procurement

Using a complete system approach, hospitals have Energy infrastructure

the potential to save 10, 20, or 30% on energy • Advanced metering solutions
costs or more, resulting in increased profitability by
• Critical power solutions
one-quarter to a full percentage point – nearly a 25
percent increase for some hospitals. The solution • Electrical distribution
should also provide CFOs with a comprehensive
• Energy price risk management
insight into both sides of energy management
– demand side and supply side – for a greater • Rate analysis and negotiation
potential for cost savings. • Market/regulatory analysis
When evaluating energy efficiency solutions, CFOs • Commodity procurement
should look for an integrated system approach that
• Billing administration and payment
uses a common architecture with smart, enabling
technology that spans numerous domains, such as
power, white space or data management, building Energy analysis
automation and management, and security. • Real-time energy usage monitoring over many years
In addition, the solution provider should have
extensive experience working within the nuances of • Energy life cycle programmes

the healthcare industry and hospital environments. • Energy surveys

CFOs should consider vendors whose solutions • ROI analysis

make energy:
• Sustainable solutions (LEED® and NABERS)
• Safe: for patients, staff, and visitors, with easy • System design
regulatory compliance

• Efficient: to improve financial performance and Building management

achieve more with less redundancy
• Building automation/management systems
• Productive: to enable less IT downtime, resulting
• Drives, motion control, motor control
in better protection of electronic health records
• Power factor correction, filtering
• Reliable: with 99.999 percent power reliability
• Lighting and sensors
• Green: to reduce energy usage and greenhouse
gas emissions • Heating, ventilation, air conditioning (HVAC)
optimization and upgrades
To achieve this broad scope, an energy
management solution should include the following • Building envelope
services and capabilities that cover both energy
• Water conservation
supply and energy demand.
• Waste heat capture
Energy source
• Carbon tracking
• Demand response incentives
• Demand response
• Emergency/standby generation
• On-site renewable
• Power factor correction

• Renewable energy incentives

Energy Efficiency Projects Ensure Healthy Financial Performance for Healthcare Facilities | 8
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Most important, integrating building management

Ongoing services with your hospital’s IT, security, and building
systems, offers greater cost savings and allows
• Proactive maintenance
facility managers to see real-time energy use trends
• Remote monitoring and building alarms, and avoid costly reactive
maintenance. For example, a smart grid enables
• Carbon reporting
organizations to link peak energy costs to load
• Long-term energy planning shedding and/or the building management system.

• Executive reporting There are many other significant cost-saving

• Training scenarios available to hospitals. For example, by
integrating bed-flow management software to
• Building optimization patient room control systems, you can set lights to
turn off and lower room temperatures automatically
All of these features and capabilities add up to for patient rooms that are not in use. Another
an integrated solution that enables hospitals to example: By integrating with the peri-operative
manage several different subsystems as a single management software systems, ventilation
cohesive network, including those from third- systems can be set to operate in a reduced mode
party providers. This ‘smart grid’ approach can when operating theatres are not in use, yet still
generate comprehensive energy savings across maintain the minimum required air changes, as well
the enterprise. In addition, it is possible to better as temperature and humidity requirements.
control and optimize overall savings over time
with an intelligent metering and centralized energy
monitoring system.

Energy Efficiency Projects Ensure Healthy Financial Performance for Healthcare Facilities | 9
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Conclusion

As the world’s population ages, and as medical Proven Success

technology continues to advance and become
more complex, the energy demands on hospitals RegionFastigheter (Sweden)
will only increase along with associated costs.
Three hospitals in southern Sweden have achieved
In addition, hospitals must be ready with the
guaranteed energy savings of more than €1 million per
resources to respond to both expected and
unexpected changes in the healthcare industry,
year and have reduced CO2 emissions by over 4724.191
such as future regulatory demands, downstream tons, thanks to a comprehensive energy performance
effects of healthcare reform and future healthcare contract.
IT innovations.
‘At the same time as we achieve significant energy
Even though there is no sure way to know what savings, we add value to our customers and our own
energy costs will be in the future, both private organization.’
hospitals and public healthcare organizations can
— Robert Johansen, Head Administrator,
start now to unearth the ‘hidden treasure’ of savings RegionFastigheter
that result from reducing costs with energy-efficient
products and services. As the statistics reported in
Kittitas Valley Community Hospital (US)
this white paper have shown, energy cost savings
are sustainable over many years, with the added Thorough energy usage analysis and planned energy
benefit of reducing the risk of incurring penalties and efficiency improvements saved this community hospital
taxes for an excessive carbon footprint. more than ¤125 138 in energy costs.
Furthermore, hospitals that embrace energy ‘Not only are we using much less energy than previously,
efficiency in new construction or building we have been able turn the savings into improved
renovations are poised to gain long-term, improved equipment and facilities. This allows patients, staff, and
financial performance, as well as demonstrate visitors to be more comfortable and to enjoy cleaner,
better compliance with patient safety initiatives and healthier air at the hospital.’
staff productivity goals.
— Randy Kaiser, Director of Facilities, Kittitas Valley
Most of all, the potential to save up to 30% on Community Hospital
energy costs is an opportunity that hospitals
should not ignore. Regardless of size or current About Schneider Electric
financial status, most hospitals can adopt an As a global specialist in energy management with
automated energy efficiency solution with either an operations in more than 100 countries, Schneider
entry-level, medium, or advanced investment. Electric™ offers integrated solutions across multiple
market segments, including leadership positions
Taking a proactive and integrated approach to
in energy and infrastructure, industrial processes,
energy management now is the most effective way
building automation, and data centers/networks, as
to achieve energy efficiency and significant long-
well as a broad presence in residential applications.
term cost savings. However, before embarking
Focused on making energy safe, reliable, and
on an energy efficiency initiative, CFOs and other
efficient, the company’s 100 000 plus employees
decision makers need to be sure they engage
achieved sales of 15.8 billion euros in 2009,
an energy service provider that understands
through an active commitment to help individuals
the goals and compliance regulations of the
and organizations.
healthcare industry. In addition, hospital decision
makers must ensure that any proposed energy Make the most of their energysm
management system can put the right information
at their fingertips, in real-time, so this critical key
performance indicator can be managed effectively.

Energy Efficiency Projects Ensure Healthy Financial Performance for Healthcare Facilities | 10
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Energy Efficiency Projects Ensure Healthy Financial Performance for Healthcare Facilities | 11
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