Sustainability and resource productivity have emerged as finance priorities for a growing number of large businesses. However, this trend has lagged in many US health systems, even though it is estimated that sustainability efforts could save the industry more than $15 billion over 10 years.
Cost containment is critical for a resource-intensive industry in the midst of significant transformation. A typical hospital campus can have up to $1 billion in operating expenses, of which roughly 1%, or $10 million, are utility costs (e.g., energy, water and waste). For a hospital operating at a 1% margin, a 30% utility cost reduction would be significant, translating to a nearly 15% increase in margin.
CFOs, however, often do not have available and transparent information about their utilities and they often perceive this function as basic operations maintenance. Achieving a strategic view of utility management can help bridge this gap by elevating energy and natural resources as strategic assets that should inform C-suite decision-making.
The healthcare industry has undergone more change in the past five years than it has since Medicare launched in 1965. With the recent growth in service demand caused by healthcare reform, three major trends are compelling healthcare leaders to focus on strategic cost containment and identify opportunities to run their systems more efficiently:
- Provider consolidation: Significant regional healthcare system consolidation is a nationwide trend; 63% of community hospitals are now part of a health system. Strategically managing operational cost centers across multiple regional facilities is an increasing challenge of these widening healthcare systems.
- Value-based reimbursement: With self-insured employers accounting for 60% of national insurer membership at Aetna and Cigna, pressure is on to shift to value-based reimbursement. At Aetna, 28% of payments to doctors and hospitals are tied to some type of value-based contract, with a target of 50% by 2018. This transition is likely to reduce high-cost inpatient utilization, constraining revenues and applying downward pressure on operating margins.
- Consumer Cost-Shifting: High-deductible plans have increased dramatically in recent years, with enrollment growing 15% annually since 2011. High deductibles are driving down volumes as patients seek to save money by avoiding health services.
The Information Gap between Operational and Financial Leadership
In this chaotic and cost-conscious environment, CFOs need better data on both the positive implications and the risks utilities can have for the bottom line.
Many health systems have designated a Chief Sustainability Officer (CSO) who is responsible for measuring and evaluating energy and natural resource consumption. However, CSO accountability is often operational, mid-level and siloed – with no direct line to Finance. As a result, it’s not uncommon for CSOs to develop their sustainability strategies isolated from key contextual business drivers, many of which have a direct and substantial impact on future utility consumption patterns and cash flows.
A complete view of utility management can bridge the information asymmetries that exist in many health systems between those responsible for managing utility costs (Operations) and those with the budget purview and decision-making authority to drive catalytic change (Finance).
A Strategic View of Utility Management
A strategic view of utility management can translate and elevate the business importance of energy and resources for the CFO. In order to best articulate the business case for utility management, CSOs should:
Analyze: Examine and consolidate available operational and capital expense data to construct enterprise utility budgets, identify gaps, inefficiencies, best practices, and utility management project opportunities.
Engage: Engage the finance department early to build buy-in and to landscape market trends and business drivers that will impact future energy, water, and waste consumption patterns.
Synthesize: Evaluate an array of long-term options to address utility expense volatility with prescriptive analytics.
Plan: Create a long-term strategic roadmap with an agile program execution model, including ‘proof of concept’ pilot projects and key performance indicators (KPIs) that tie energy, water, and waste to financial and operational performance.
Automate: Centralize and automate utility management operational functions by streamlining reoccurring processes like bill payment, analysis, and reporting.
Optimize: Explore value of optimizing utility transactions (OpEx and CapEx) via a Utility Money Management Account that stabilizes utility cash flow volatility and reduces payback periods for key projects.
 “Sustainability: Why CFOs are driving savings and strategy.” Deloitte University Press. 2012.
 “Can Sustainable Hospitals Help Bend the Health Care Cost Curve?” The Commonwealth Fund. Issue Brief. November 2012.
 Derived from 2013 financial statements for the University of Washington Medical Center and Virginia Mason Medical Center.
 Margin calculations are based on revenue less expenses before and after estimated reduction of utility costs as a percentage of total expenses.
 AHA TrendWatch Chartbook 2014. Table 2.1: Number of Community Hospitals: 1992 – 2012.
 “Where healthcare is now on march to value-based pay.” Modern Healthcare. January 2015.
 “New census survey shows continued growth in HSA enrollment.” AHIP Survey. July 2014.Garrett Kephart is Practice Leader, Sustainability & Resource Productivity and Barry Gordon is Principal, Business Intelligence and Analytics, at Point B, Inc.