The operating margins for hospitals are very small with an average of 2-5% for United States hospitals that actually make money. Over one half of United States hospitals lose money on operations and stay in business through corporate or government subsidies or through their investment income. Since over half of hospital costs are related to labor and benefits, it is a common approach to simply eliminate positions in order to achieve a balanced budget. Health care executives should adopt an approach of “being hard on things and good to people.” By taking advantage of every available non-labor related cost savings initiative, hospitals can afford to have a better ratio of staff to patients which is an important component of quality. Here are some lessons learned from the United States that have international application for healthcare organizations.
Energy management is often overlooked by healthcare executives looking to improve margin without impacting people, equipment, or programs. There are several avenues to lower costs in energy management from supply side bulk acquisition of power through a buying coalition to capital equipment-driven control system solutions on the demand side.
Should you use the leverage that aggregation provides to acquire power at the lowest possible cost? Absolutely, there are advantages to participating in purchasing coalitions that lead to cost savings that cannot be achieved as an individual organization. The larger opportunity however is on the demand side. Although programs that provide techniques such as energy efficient lighting and motion detector switches are effective, the more lucrative opportunity is in the infrastructure of air handling, boilers, chillers, and other major pieces of equipment often managed through a control system. Many hospitals are now taking advantage of unique software driven programs to acquire data from existing control systems to identify opportunities to improve efficiency. This data, when organized into an action oriented work plan allows hospitals to create a baseline of cost, implement change and quantify the cost savings associated with that change. Cost savings in the 8-12% range are being achieved simply by making equipment that already exists run more efficiently.
For those organizations that do not have a control system or have inadequate systems, the challenge is to find ways to fund these purchases. This is often difficult because of the challenge of infrastructure purchases competing with clinical equipment. When executives are debating the purchase of a clinical item with a clear rate of return such as a Cardiac Catheterization Laboratory versus the addition of control systems to manage energy, the clinical needs almost always prevail. There are new and innovative financing options available that focus on energy improvement assets for hospitals of any size. Some key components of these plans include a 3 to 5 year return on investment with no impact on the balance sheet, investment grade rating or cash on hand. The best programs also offer annual “opt out clauses” as well as rental options.
Case Study: A 400-bed medical center was looking for ways to lower costs with initiatives that did not directly impact labor. Like many healthcare organizations their campus contained multiple buildings, additions, and expansions completed over several decades. Recognizing that energy management provided an excellent opportunity to lower costs, the hospital’s administrative team sought a solution that was not capital equipment driven due to limited funds and the competition for dollars to support clinical needs. Our organization assisted this facility by engaging its “best practice” partner in energy management to complete a no-cost energy assessment. This involved the completion of a simple two-page data sheet and a site visit to tour and inspect the major energy-related components of the hospital’s plant. Based on this analysis, a baseline cost was established along with a focused work plan to achieve the targeted cost saving opportunities. All elements of the proposed work plan were accepted with an estimated annual cost savings of $143,000. The plan is currently being executed to realize the savings through better sequencing of equipment, decreasing boiler pressures, and other strategies that do not involve capital expenditures.
Take Home Message: Cost reductions can be achieved via energy management initiatives that improve margin without reducing staff. The savings in this example would equate to deleting three bedside registered nurse positions if labor reductions were used to gain the same cost reductions. It should also be noted that the age of a facility is not always the best indicator of opportunity. In a recent evaluation of a two hospital health system, there was more energy savings opportunity in the 2 year old facility than their sister facility which was over 100 years old. Although this seems counter intuitive, modern day equipment often carries a greater energy load and commissioning activities to open a new facility often focus on whether the equipment works and not on how efficiently it works. Health care executives should continuously look for ways to be “hard on things and good to people.”
About Author
Kevin Shrake is a 35 year veteran of healthcare. He has been a trusted advisor to many health care executive colleagues and assists facilities of all sizes and configuration by solving business problems in healthcare using best practice resources. Mr. Shrake holds a Masters Degree in Health Administration from the University of Illinois and is board certified as a Fellow in the American College of Healthcare Executives. He currently serves as the Executive Vice President and Chief Operating Officer of MDR™ based in Fresno, California. (www.mdresources.net) Mr. Shrake may be contacted at kevinshrake@mdresources.net.
