HealthTrust's energy procurement solution helps members save millions of dollars
When an unexpected shift in the polar vortex sent temperatures plummeting across many parts of the United States last winter, businesses and schools closed, and thousands of flights were canceled. The price of natural gas and electricity in some regions skyrocketed, which all but destroyed many hospitals’ energy budgets for the year—but not all.
Thanks to an aggressive energy price risk management plan, Livonia, Michigan-based CHE Trinity Health (then Trinity Health) was relatively unaffected by the extreme weather. By the time the harsh winter hit, the organization already knew the price it would pay for much of the energy it used in its West and Midwest facilities.
Since 1999, EnergyTrust, the energy procurement solution from HealthTrust, has helped members save millions of dollars through leveraged, strategic buying of deregulated natural gas and electricity from a network of 70 energy suppliers, ranging in size from local suppliers to major international companies. In 2013 alone, hospitals enrolled in EnergyTrust (more than 800 for natural gas and 200 for electricity) had a combined savings of $32 million, which represents 15 to 20 percent average savings over energy purchased from a regulated utility.
“One of the best features of the new program is the initiative HealthTrust can take on our behalf … HealthTrust knows our strategy and brings us appropriate recommendations proactively.”
—Dan Pompa, strategic sourcing manager at CHE Trinity Health
Those savings come not just from leveraged buying, but also from customized hedging programs that seek out the right balance of risk and reward for EnergyTrust members.
“At about 2 percent of operating costs, utilities including energy represent a significant spend for hospitals,” says Jon Ervin, AVP of EnergyTrust. “Even if you do a great job of controlling costs, you can absolutely destroy operating margins if there is an energy market dislocation and you aren’t hedged.”
Hedging helps hospitals reduce financial exposure to volatile and potentially rising energy costs by locking in future prices and margins in advance.
“Hedging protected CHE Trinity Health from volatile gas and electricity pricing caused by the harsh winter,” Ervin says. “The program buys competitively, but also manages price risk. It’s one of the most enlightened approaches to the process of energy procurement in the market.”
A Prototypical Program
CHE Trinity Health’s $38 million energy procurement program may be prototypical now, but it wasn’t always so sophisticated, according to Craig Killingbeck, executive for purchased services at CHE Trinity Health.
Each of the former Trinity Health hospitals made its own energy buys. “There was no coordination of any kind until 2003, when we started an energy procurement program across the existing system,” he says. “We saw an opportunity to save money if all of our facilities bought energy together.”
But even once the energy program started, and supply chain leaders found a consulting firm to help make the coordinated buys, the program was disappointing. It required more work than necessary, and it wasn’t very effective.
“One of the best features of the new program with HealthTrust is the initiative HealthTrust can take on our behalf,” says Dan Pompa, strategic sourcing manager, CHE Trinity Health. “While in the past we had to reach out to identify the best times to buy, HealthTrust knows our strategy and brings us appropriate recommendations proactively.”
Following the 2007 merger between Consorta (of which then-Trinity Health was a member) and HealthTrust, Killingbeck and his team sought to learn about the different solutions and opportunities HealthTrust had to offer, including EnergyTrust.
“We were very pleased with the EnergyTrust team’s expertise with healthcare-specific energy buys,” Killingbeck says. “We benefit from their high level of expertise.”
Low Cost, High Value
In 2008, as members faced new carbon-footprint reporting requirements from the EPA, HealthTrust began a search for a supplier that could help. A year-long sourcing process ended in a signed contract with National Information Solutions Cooperative (NISC), which combines utility bill pay services with robust utility usage reporting capabilities in a low-cost, high-value contract for HealthTrust members.
In 2011, a large HealthTrust member, already utilizing NISC through a non-HealthTrust agreement, saved over $50,000 simply by transitioning to HealthTrust’s agreement. With the volume-discounted fee structure, participating members have seen a reduction in the fee per invoice of 41 percent since 2009. For the member that transitioned in 2011, even after doubling the number of invoices processed by NISC during the past few years, it realized a total savings of over $70,000 this year compared to its previous contract.
Started as a pilot program in 2009, the EnergyTrust Utility Bill Pay program relieves accounts payable personnel of the time-consuming activities inherent in receiving, auditing, documenting and processing utility payments. It also eliminates the possibility of late fees and billing errors.
For many participating HealthTrust members, the late-fee savings alone is reason enough to sign on. But the program provides additional value when used as a diagnostic tool.
When NISC receives an invoice, it’s scanned and the critical data is extracted and saved into a database, which users can access through the NISC website using a customer-specific login. Once on the website, decision-makers from various departments can view the data or run reports that are pertinent to their areas of interest.
Having access to this data is a game-changer for many hospitals, says Katie Owen, senior energy analyst, HealthTrust.
“Accounting and engineering are typically not next-door neighbors within a hospital,” she says. “Those utility bills are going directly to accounting and engineering never sees them. That’s not the case with the Utility Bill Pay program, which makes the data accessible to multiple stakeholders, a feature often lacking in a traditional accounts payable process.”
Any HealthTrust member, not just those buying energy through EnergyTrust, can contract with NISC to manage payment for any number of recurring bills, including natural gas, electricity, sewer, water, garbage and telecom services.
The EnergyTrust team, composed of Ervin and 10 other HealthTrust employees, represents over 125 years of diverse energy industry experience. The HealthTrust affiliation provides instant market credibility to the program, while a “no exclusive vendor” policy enhances competition among the 70 energy suppliers under contract. Meanwhile, proprietary and compliant HealthTrust energy purchasing agreements minimize legal review in order to expedite the energy purchasing process.
Another HealthTrust member procuring energy through EnergyTrust is Franklin, Tennessee-based Community Health Systems (CHS). Of the 206 hospitals owned, operated or leased by CHS’s affiliates, 118 of them are located in deregulated markets and purchase their natural gas and/or electricity through EnergyTrust contracts.
The savings have added up over the years ($5 million on natural gas in 2013 alone), but the headaches haven’t, despite the sheer number of facilities involved.
“We value the uniformity of contracts,” says John Canaan, director of project engineering at Community Health Systems Professional Services Corporation. “It’s a straightforward process that facilities can understand.”
Based on this success, when the organization makes an acquisition, Canaan immediately checks to see whether the new facility is located in a deregulated market served by EnergyTrust. CHS engaged EnergyTrust for energy procurement for a three-facility acquisition and saved $1 million in electricity costs in just one year.
Canaan also appreciates the reporting available through the program, which is something CHE Trinity Health’s Killingbeck also took note of when first vetting EnergyTrust.
“Data and analytics are a large part of what you need to carry out your work, and EnergyTrust makes data available in a readable manner that is easy for everybody to use,” Killingbeck says.
In addition to customized forward-buying tools that EnergyTrust and CHE Trinity Health’s supply chain group co-developed, the organization also takes advantage of the EnergyTrust Utility Bill Pay program, powered by NISC (HealthTrust Contract No. 2570), which provides detailed energy usage reports in addition to bill payment services.
“The bedrock foundation of any risk or energy management program is timely information; NISC reports provide critical feedback on program performance and critical data to support facility operations.” Ervin says.
The Importance of Governance
Adding to the success of CHE Trinity Health’s energy procurement program is a governance structure that has taken energy-buying decisions out of the hands of individual hospitals. It was a fundamental change for the system, but one that was necessary to take advantage of fast-changing market conditions. Instead of facility managers at each hospital making energy purchasing decisions, the seven-person CHE Trinity Health Energy Committee directs energy buys for all of its hospitals located in deregulated markets.
Made up of regional facility supply chain and treasury representatives, the committee meets with EnergyTrust on a biweekly basis to review market conditions, recent energy buys, current volumes and new recommendations. If a decision is needed, committee members vote by email with each member having an equal vote, whether that person is from facilities, supply chain or treasury.
The committee is about to get bigger as the team brings in the new hospitals associated with the enterprise since the May 2013 merger that created CHE Trinity Health. Each will be added to the energy procurement program that will grow the total managed annual energy expenditure from $38 million to $70 million.
“Moving all of our hospitals to EnergyTrust provides efficiencies that will benefit our whole enterprise significantly,” Pompa says. “Every dollar saved is reinvested in our efforts to improve health and contributes to better care for our patients and their communities.”
A Reliable Energy Partner
While CHE Trinity Health has a multitude of in-house resources dedicated to energy procurement, IASIS Healthcare Inc., has only one—Joey Abney. The lean management operation of the for-profit, 16-hospital system based in Franklin, Tennessee, means that Abney relies on EnergyTrust for more than just market intelligence.
“I’m a one-man department, and I wear many hats here,” says Abney, vice president of design, construction and plant operations at IASIS. “Being a small company with limited resources, it’s comforting and beneficial to have an experienced partner like EnergyTrust. It brings great value and saves our company operating costs, which go right to the bottom line.”
EnergyTrust manages natural gas procurement for 15 IASIS facilities and electricity for two. In 2013, IASIS saved $665,000 on natural gas, which represented a 27 percent savings over local utility rates. The electricity program is expected to save IASIS about $125,000 annually starting in 2015.
While Abney is interested in securing the most economical energy source, he underscores the importance of that energy source being reliable. In Salt Lake City, where IASIS operates five hospitals, an extreme cold spell last December depleted the natural gas supply for hospitals across the region, but access to a secondary supply was on hand.
“Our most important thing is patient care, and we need reliable energy to deliver that care,” Abney says.