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Hospitals hit the energy wall

by Dave Todd

Since the mid-1990s, the cost of running hospital systems has risen dramatically throughout Canada. Hospital administrators battle with ever-tightening annual budgets and community antagonism to politically sensitive remedial measures such as institutional mergers and proposed closures of aged facilities, some as much as a century old and in desperate need of upgrading. In addition, the number of managers in the system has decreased by about 50 percent, leaving those remaining with little time to focus on issues not directly related to patient care.

One of the biggest casualties of the situation, according to Gaston Levac, president of the Canadian College of Health Services Executives, is the non-clinical infrastructure of such institutions. While contracting out the management of many non-medical services required by hospitals is becoming the norm, "of all the opportunities for contracting out maintenance of buildings including energy consumption is the one that has received the least consideration," he said.

The significance of that is huge, just in the case of energy procurement alone - items like fuel, electricity and related fuel-systems maintenance and service typically comprise about 2.5 to 3.5 percent of a Canadian hospital's overall annual budget. That may not seem big, but once the bulk of hospital costs accounted for by wages and salaries are removed, this figure can range as high as 40 percent or more of spending. Moreover, with the advent of electricity deregulation - in place in Alberta, about to be introduced in Ontario and on the drawing board in New Brunswick - energy procurement-related issues are gaining prominence.

Just ask Brock Marshall, director of engineering operations for Ottawa's 1,050-bed Ottawa Hospital system, strung over three "campuses" that span the nation's capital. Like his counterparts at more than 220 other hospital facilities in Ontario (and a growing number in British Columbia and Alberta), Marshall deals with a Toronto-based company called HealthPro Procurement Services Inc., the largest group purchasing services organization in Canada.

Thanks to HealthPro's client clout, the organization is able to negotiate seasonal fuel contracts that have seen hospitals paying well under half of market rates on the spot purchase market, thus sparing its clients skyrocketing energy bills which would have sent their health facility support services budgets through the roof. The Ottawa system, which has a mixture of power generation sources at its various facilities, needs to know on four hours' notice if it has to switch one of its plants, a dual-fuel generator, from one source to another. Its arrangement with HealthPro enables it to serve such notice to the company and make a decision on five minutes' notice whether it makes economic sense to make a spot market purchase. Adds Marshall: "It doesn't happen very often that we have to do this. But I don't want to pay somebody 65 or 75 thousand a year to do this for me; these guys [HealthPro] do this for a nominal fee."

But acquisition and management of fuel supplies and related systems services is maybe the least important part of energy procurement when it comes to hospitals, some energy efficiency analysts maintain. One such expert is Alan Houghton, chief healthcare market specialist for DukeSolutions, the energy services division of Duke Energy, one of the world's largest and most diversified energy multinationals.

Houghton, based in New York, says that despite the differences that may exist between the governance of hospital systems and their ownership structure in the US and Canada, there are inescapable fundamentals at work that affect energy procurement choices. Viewed from the strategic level, little of what's most important when it comes to energy-related considerations has to do with managing things like fuel purchases and out-sourcing jobs related to systems maintenance.

What get lost in the mix, Houghton argues, are the most important things. They're so far down the priority scale of senior hospital systems managers that a procurement officer responsible for nailing down services contracts for aging systems rarely sits down with a hospital's chief financial or chief operating officer to discuss what is often a fundamental and mutual problem.

Why would that be? Simply, says Houghton, whether in the US or Canada, "one of the last things on the capital investment list in any health care organization would be something like rewiring the building so that the emergency generation can function effectively in a 'power-out' situation."

Don Spielmacher agrees. Vice President of the Canadian Healthcare Engineering Society, he is also environmental services director of the 80-bed Hanover and District hospital near Lake Huron. He oversees a multi-year contract with HealthPro for natural gas and, once Ontario's electricity deregulation begins, will also be responsible for a five-year bulk purchase electricity contract for which HealthPro has signed up his and many more of the province's hospitals, in a virtual one-stop-shopping power procurement foray.

But Spielmacher worries that small and medium-sized institutions are not collecting the wherewithal to address broad challenges related to engineering maintenance matters. This is a growing concern for him and his counterparts across Canada. Moreover, it's at precisely such a point that medical and building maintenance concerns intersect. As Spielmacher points out, approximately 25 changes of air per hour are required in a hospital operating room and this capability must be available at all times - a procedure that "is very, very expensive" to ensure and perhaps, in a cost crunch, may mean eliminating other things. And, reducing energy requirements in what hospitals call "the silent hours" is tough given stringent base requirements that must be held at all times. There are new systems being introduced that can reduce energy usage per square metre of floor space throughout a hospital (the basic standard of measurement) to one-third or less of what was the case in the 1970s but, with or without such improvements -some of them a function of automation - hospitals remain labour-intensive. This poses its own continuing challenges for procurement managers responsible for energy security at Canadian health care institutions.

So, back to Alan Houghton of DukeSolutions and his comments on the similarities and differences in procurement between the US and Canadian health care systems.

He cites, as a theoretical example, a mid-size American city hospital system in trouble and not knowing where to find an energy cost life raft. The systems' procurement system is swamped. It's maybe seven different hospitals operating under a unitary managerial structure not equipped to deal quickly with the vastly differing energy requirements, sourcing requirements, different missions, particular staffing requirements and institutional cultures of the various hospitals within the system. . In short, the whole darn thing is a mess and senior and middle managers are failing to mind the store when it comes to infrastructure maintenance. Much more thinking is needed about how to someday replace it.

Who does that job? In the US, huge companies with global reach are saying "Let us; we will buy outright your energy facilities on site, your aging, on-site dedicated power plants (for example), refurbish them on an ongoing basis or build new ones. And we'll give you, up-front, a fair market value." It is a matter of time before companies like Duke and Enron (one of the world's largest energy services firm) come knocking on Canadian hospitals' doors to do similar deals. Local or regional hospital authorities in Canada, and provincial government entities charged with overseeing such matters, must find, either separately or collectively, the matching expertise to vet such propositions.

Dave Todd is Canadian correspondent for FT Energy Insight, an online energy news service of the Financial Times of London. He is also a 16-year veteran of daily newspaper and news service journalism in Canada.

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