Planning for the Long Term: Why Hospital CFOs Should Consider Green Strategies

Throughout the past few years, many studies and analyses have concluded that healthcare sustainability investments are not only good for a hospital or health system's mission — they are also good for the bottom line.

For example, a study from architecture firm Perkins+Will showed hospitals that pursue Leadership in Energy and Environmental Design, or LEED, certification don't add much to the total capital construction costs, but they benefit from the energy savings associated with LEED designs. Researchers analyzed 15 LEED-certified hospitals completed between 2010 and 2012, finding LEED-certified hospitals with less than 100,000 square feet added only 1.24 percent to their capital costs on average. For LEED-certified hospitals larger than 100,000 square feet, the average capital cost premium was 0.67 percent.

Greening at Cadence Health
For Cadence Health, a two-hospital system based in Winfield, Ill., sustainability has been a core goal for both long-term strategic planning as well as promoting a healing environment. In 2011, the system completed a five-story bed tower for Central DuPage Hospital in Winfield. The 280,000-square-foot project cost about $200 million, and the tower attained LEED Silver certification.

Cadence CFO John Orsini says capital projects like the bed tower involve several levels of decision-making. Increasingly, executives are factoring in sustainability and greening with the rationale that those strategies improve their communities but also offset today's growing financial pressures.

"In terms of sustainability, I try to look at the total cost," Mr. Orsini says. "It's easy to just say whether we're going to build something or buy something. You also have to think about what are the maintenance costs, what's the energy usage and — when you get into medical devices and patient care — what are the costs of disposing things?"

Hospitals can find easy "win-win" situations without much capital investment. One such situation Mr. Orsini mentioned is medical device reprocessing — in which an outside vendor disassembles, cleans, remanufactures, tests and sterilizes single-use devices like ultrasonic scalpels, and hospitals buy back the reprocessed device at a cheaper rate. It reduces landfill waste and the "high costs" associated with red bag waste, he says.

Those bottom-line savings could help a hospital or health system's financial report card from the perspective of a credit rating agency or bank, especially if the organization is also taking on larger capital projects.

"There's an increase in capital expense and depreciation, but you're also getting improvements in operating income immediately," Mr. Orsini says. "From that perspective, it's effective to external constituents."

Saint Peter's Healthcare System's solar project
In 2011, New Brunswick, N.J.-based Saint Peter's Healthcare System dug its heels into a green project that few other peers had: constructing a solar power system.

Saint Peter's, which includes 478-bed Saint Peter's University Hospital, a teaching facility, partnered with New Jersey's largest gas and electric utility, Public Service Electric and Gas Co. to install solar panels at four different sites owned by Saint Peter's, including the hospital. Altogether, the project cost about $9 million upfront.

Garrick Stoldt, CFO of Saint Peter's, says initially, he knew the solar power system would help the environment. The economics were the tough sell. "I was very skeptical, quite honestly, at the beginning," Mr. Stoldt says. "I was not necessarily in favor of it. But this is a hedge on future energy prices."

PSE&G financed 60 percent of the project with a loan, while a federal grant covered 30 percent. Mr. Stoldt says those pieces were necessary to move the initiative forward.

The icing on the cake? Solar renewable energy credits, or SRECs. SRECs essentially are a commodity that allows an organization to sell surplus energy. Saint Peter's solar project included SRECs, which meant the system now had two sources of revenue: the ability to produce power and the ability to sell SRECs, which could help pay down the loans and eventually become an independent cash flow.

The combined solar system is expected to save Saint Peter's $10 million in electricity costs over the next 25 years, and Mr. Stoldt says the current ROI has already been worth it.

"If you look at hospitals, we are very high consumers of energy because of the technologies we use," Mr. Stoldt says. "There's a lot of medical equipment that is high energy. Our energy needs grow every year. Finding ways to be more efficient with our base business is really important."

Sustainability measures equal long-term financial planning
Greening themes resonate closely with hospital communities, as public health and environmental issues are often tied together. The economics of large-scale sustainability projects, though, are the biggest hurdle for hospitals and health systems.

Proving that a particular capital project benefits the environment, and especially the organization, in the long term will more often than not justify the sometimes prohibitive costs.

"It's really more working with the management team and getting them to really appreciate and understand the long-term implications we're creating through long-term investment," Mr. Orsini says.

Healthcare finance professionals who evaluate the small wins, like energy, could also succeed in the end because hospitals will continue to be energy-intensive institutions.

"If you take a step back — and as healthcare organizations, this isn't going to change — we are large consumers of energy," Mr. Stoldt says. "Almost every CFO has to look at the impact of energy and energy use on healthcare facilities. To me, [the solar power project] made tremendous sense once we were comfortable with the economics."

More Articles on Healthcare Finance:
The State of Healthcare Finance: 9 Major Survey Findings From Hospital CFOs
Rooting Out the Waste: Virginia Mason's Suzanne Anderson on What Makes an Efficient Hospital
How Kuakini Medical Center Plans to Save $1M Per Year

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