For hospitals and health systems, this is a critical time to rethink the energy infrastructure. Healthcare leaders want modernized facilities that support patient care objectives while achieving their challenging financial and operational goals.
Today, healthcare facilities spend $5 billion annually on energy, which represents millions of dollars per facility per year. Healthcare facilities also face challenges in operating their energy infrastructure, maintaining it and continuously investing in it.
To better understand how healthcare organizations can improve critical system reliability while demonstrating fiscal responsibility, Becker’s Healthcare spoke with experts in the Energy-as-a-Service (EaaS) space. They explained what EaaS is, explored why healthcare organizations are adopting EaaS and described benefits, opportunities and why working with the right partner matters.
Key insights from the conversation are highlighted below.
Hidden infrastructure risks
At its core, healthcare is about caring for patients. That commitment is reflected in hospital and health system strategies, operations and finances. Labor, medical supplies and pharmaceuticals make up the largest operational expenses, while capital spending often centers on medical equipment and digital health technologies, rather than physical infrastructure.
Yet healthcare leaders understand that mission-driven clinical care depends on a strong environment of care. Safe, high-quality outcomes require reliable electricity, heating and cooling. These systems aren’t optional; they’re critical.
As the demand for healthcare services continues to grow, executives recognize that a reliable infrastructure will be even more important. While having a reliable infrastructure is a necessity, managing a facility’s energy infrastructure comes with considerable complexities and risks.
Bryan Haag, director of Entech’s utility, energy and FCA services emphasized that even though infrastructure is essential, “The core mission of healthcare facilities is patient care, not operating their mechanical systems or operating their utility systems.” A healthcare CFO recently mentioned to Mr. Haag that costs centered around mechanical or utility-related concerns at his facility are impacting his organization’s capital outlays. Managing equipment or system failures is becoming a strategic imperative to stabilize margins and long-term planning.
While CFOs don’t want unplanned expenses, operational leaders don’t want unexpected disruptions. Mr. Haag shared that he often hears from facility leaders who are overwhelmed with reacting to emergencies, installing complex new systems and addressing the ongoing challenges of day-to-day operations and maintenance.
These challenges are amplified as healthcare organizations increasingly face labor issues in hiring qualified individuals with experience and knowledge in areas such as steam, chillers and mechanical systems. “You need to have good operators in your facilities,” Mr. Haag said, but he sees many healthcare organizations struggling to hire highly skilled operators needed to manage the design process and installation.
As a result, “We’ve seen a lot of healthcare organizations trying to operate systems [on their own]. It looks good on paper, they purchase a system, they implement it and then they struggle to operate it as efficiently as possible,” Mr. Haag said.
Facilities that supplement their workforce with a third-party partner with deep energy infrastructure expertise can improve reliability, lessen the operational burden on facility managers and operators, and reduce the organization’s strategic, business and financial risks, while maintaining their staff and even growing the employees’ skillsets.
Redefining energy strategy: Rethinking operational and financial models
EaaS is emerging as a compelling model for healthcare organizations to improve the reliability of their infrastructure, reduce their managerial, operational and financial burden and monetize existing assets by turning them into liquid capital, freeing up budgets for investment in patient-focused initiatives.
EaaS defined
Jaime Boisver t, executive director, global development Sustainable Infrastructure at Johnson Controls Inc., explained that an “as-a-service” model is agnostic with regard to asset ownership and enables healthcare organizations to work with a partner to transfer their energy portfolio needs, upgrade their systems, reduce their operating expenses and improve their working environments — all without upfront capital investments.
Ms. Boisvert explained that JCI’s EaaS consists of three elements:
- Design-build. Any as-a-service project starts with designing and building, either in a renovation of existing assets, addition of new capacity or some combination of both. “There’s always some component of a construction project, which takes skilled project managers and coordination to manage across operating buildings without disruption,” Ms. Boisvert said.
- Financing. Before designing and building, there are different financing models and structures that must be considered and agreed upon. These models involve determining who provides the financing, whether it is debt or equity, tax-exempt or taxable, and the accounting treatment.
- Operations. This involves operating and maintaining the energy systems over the life of the EaaS agreement at the lowest cost, managing all upgrades and repairs, and handing back the system to the healthcare organization in an asset condition with residual value. All of this is contracted for and the provider is subject to financial penalties for non-performance
Operational structures and benefits
According to Stephen J. Auton-Smith, senior managing director at Ernst & Young Infrastructure Advisors, the key driver for healthcare organizations to adopt EaaS is operational.
While every facility has its own operational objectives, he sees organizations mainly focused on reliability and resilience, which is driving projects such as chiller electrification, energy efficiency retrofits, renewables, demand-side management, different approaches to backup power and more.
Among the key EaaS operational benefits healthcare organizations are focused on are performance guarantees, redundancy and resiliency, and proactively taking care of deferred maintenance.
“These [EaaS] structures help hospitals ensure they’re not going to have an outage,” said Matthew Neuringer, partner at Orrick.
Financial models and benefits
“One of the reasons healthcare organizations choose EaaS is to use third-party capital — whether that’s private sector equity, third-party debt or a 501(c)(3) tax-exempt-type structure,” Mr. Auton-Smith said. He noted that not all EaaS projects use taxable finance. Increasingly, organizations are bringing tax-exempt finance into the mix, which helps neutralize the cost of capital. “It’s about preserving the institution’s debt capacity for its core mission,” he said, as well as turning a major upfront investment into ongoing OpEx.
In addition to accessing external capital, EaaS presents other financial opportunities like off-balance sheet transactions. This can free up the organization’s capital for other purposes without negatively impacting an organization’s credit rating.
In Mr. Auton-Smith’s experience, ratings agencies tend to view EaaS transactions as credit neutral, because these transactions enhance the reliability, resilience and performance of the organization by establishing a more reliable energy system, which is likely to reduce and stabilize long-term operating costs.
However, to ensure against credit rating declines, Mr. Auton-Smith suggested that senior executives engage in thoughtful forward-looking planning. This involves proactively considering what an EaaS transaction might look like — which includes preparing an initial business case and doing a feasibility study to anticipate the appropriate accounting treatment and how credit agencies might respond. By maintaining open communication and continuously refining expectations, and involving key stakeholders throughout the process, organizations can avoid unexpected issues at a transaction’s final stage.
Organization-specific EaaS discovery
Whether EaaS is a fit depends on an organization’s situation and goals. Ms. Boisvert said it is necessary to engage in a thorough discovery process to get a clear picture of an organization’s financial and operational goals and to evaluate the energy infrastructure. Her team at Johnson Controls achieves this by applying an intensive discovery process, which focuses on defining the outcomes an organization is looking to achieve.
“If in the discovery process, we hear that capital preservation is really important, or if an organization wants to transfer risk [to a partner] to better focus on their primary mission, or if limiting credit impact is key, then often EaaS is a good fit,” Ms. Boisvert said
A key to EaaS success: Choosing the right partner
EaaS is about partnering to optimize demand management and the supply side to create the most dynamic operational environment, reduce operating costs and manage and stabilize CapEx expenditures.
Because the partner is such an integral part of the success of the EaaS engagement, and because these relationships are long term, selecting the right match is critical.
Ms. Paris Boisvert added that the right partner will have a proven track record of delivering all critical elements of EaaS. Tailoring operational solutions and financial structures to meet each organization’s unique needs is essential. “Service providers may say ‘Sure, we can do that.’ But what really matters is their ability and track record to deliver on the KPIs, the outcomes and the guarantees in the contract for the long term,” Ms. Boisvert said. She also emphasized the importance of vetting partners for their healthcare knowledge.
“You want to look for a partner that has a history of doing this type of work,” Mr. Haag advised. “You want a partner with the experience and resume you are looking for, and a partner with financial expertise.”
This approach resonates with healthcare organizations. “JCI has a proven track record: We operate, maintain and manage the lifecycle needs of 40 sites across North America today. We deliver this site-based service, being held contractually accountable for availability and quality of the entire facility, and specifically the environment of care,” Ms. Boisvert said. Additionally, 83% of North American hospitals work with Johnson Controls products.
Key EaaS benefits
When done right, EaaS enables organizations to focus their capital, attention and resources on what matters most: Providing excellent patient care and helping their communities stay healthy.
By choosing the right EaaS partner, healthcare organizations can improve the reliability of their energy infrastructure with specific performance guarantees. Facilities can have access to qualified operators, lower their ongoing energy costs, decrease their operational and managerial burden, make progress toward a more sustainable decarbonized future, and reduce or eliminate energy-focused capital outlays by securing 100% of financing from external sources.
With Johnson Controls, “EaaS is a tailored solution. It enables healthcare organizations to focus on their primary missions and shift the risk associated with [managing the energy infrastructure] and ensuring that it delivers on patient-centered outcomes, to us,” Ms. Boisvert said. “In any relationship, you’re looking for someone who makes you better and who completes you,” Ms. Boisvert said. “In our approach, it’s not a product that we’re bringing to a healthcare organization, saying you need to fit into this box. Instead, we’re able to tailor it to their needs, so each client is achieving whatever they’re looking to achieve.”
