Demystifying First-Cost Green Building Premiums in Healthcare

Summary of Findings

This research focuses on the first-cost green building premiums estimated from 13 green healthcare construction projects in the United States, ranging in size from 28,000 square feet (SF) to 470,000 SF. Eleven of these projects were completed between 2003 and 2008; two are to be completed in 2009. Owing to differences in size, energy intensity, and program complexity among the sample projects, this research distinguishes among three related but distinct medical building types—acute-care hospitals, outpatient buildings, and mixed-occupancy facilities. Participants completed a standardized information matrix, which was followed by a telephone interview.

The subject projects reveal the complexity of estimating first-cost green building premiums in the healthcare sector. Overall findings include:

A closer analysis reveals a range of factors that contribute to the variability of reported first-cost green building premiums; these are examined at length later in this article:

In all instances, projects that received financial incentives used them to “buy down” or reduce the reported first-cost premium. A summary of findings is presented in Exhibit 1.

The data further suggest that an owner's motivation for undertaking a green building process is key to determining the elements included in the first-cost green building premium reported. Subject projects that prioritized occupant health and safety, for example, were more likely to exclude healthier material selection from their premium calculation. Project teams that focused on operational efficiency in some instances used the operational savings expected to accrue from energy and water efficiency measures to justify green strategies with capital cost premiums that do not offer a direct quantifiable financial payback, such as enhanced indoor air quality or outdoor places of respite. These trends and attitudes are examined in the sections that follow.

Background: What Makes Green Healthcare Unique?

Healthcare is the largest single service sector in the U.S. economy; the U.S. Department of Commerce International Trade Administration (2008) estimates that it represented 16% of the gross domestic product (GDP) in 2007, and this is projected to grow to 19.5% of GDP by 2017. The sector also acts as an economic driver through job creation—the U.S. Department of Labor Bureau of Labor Statistics (2008b) estimates that the sector employed approximately 13.28 million people as of May 2008. In many regions, healthcare is the dominant employment sector (Bureau of Labor Statistics, 2008a); in 2007, hospitals were the second largest source of private sector jobs in the United States (American Hospital Association, 2009).

Healthcare construction is experiencing its largest building boom in decades (McGraw Hill, 2007). This reflects, in part, the fact that many healthcare facilities constructed in the 1950s and 1960s have reached the end of their useful life and need to be replaced (Carpenter, 2008). In some regions, changes in regulatory standards—such as seismic regulations in California (Office of Statewide Health Planning and Development, 2005)—are further accelerating the healthcare construction boom. According to the U.S. Census Bureau (2008), healthcare invested $47.4 billion in construction between April 2007 and March 2008, a 7% increase over the previous year. The investment banking firm FMI Corporation projects annual healthcare construction spending to reach $60.1 billion by 2010 (Kure, 2007).

Although healthcare was initially slower to embrace green building principles and practices than other sectors, such as commercial office buildings (Green Buildings, 2007), McGraw-Hill Construction and Research Analytics (2007) projects a substantial increase in green building projects in the healthcare sector in the coming years; the percentage of healthcare organizations that projected that more than 30% of their projects would have a green building focus jumped from 4% in 2006 to 6% in 2007 to 19% of building starts in 2008. The steady increase of Green Guide for Health Care registered projects from 2005 to 2007 (Figure 1) is another indicator of the increasing engagement of the healthcare sector in sustainable building.

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Figure 1.

The growth of Green Guide registered projects held steady throughout 2007.

The healthcare sector spans a range of building types including hospitals, outpatient clinics, medical office buildings, and labs (Joint Commission, 2009). According to the U.S. Department of Energy Commercial Buildings Energy Consumption Survey, licensed acute-care hospitals represent only 6% of the total number of healthcare facilities, but 60% of total square footage (U.S. Department of Energy, 2003). Acute-care hospitals are on average more than 16 times the size of a typical office building (about 241,400 SF for inpatient healthcare buildings compared to 14,800 SF for office buildings) and operate with more than twice their energy intensity per square foot (187,700 Btu/SF for inpatient healthcare buildings compared to 92,900 Btu/SF for office buildings) (U.S. Department of Energy, 2003). In comparison, outpatient healthcare facilities such as medical office buildings display energy intensity similar to commercial office buildings (94,600 Btu/SF), although on average they are slightly smaller (10,400 SF). Given the range of energy intensity associated with specific types of healthcare facilities, it is essential to differentiate these buildings based on programs and services to establish a relevant basis for comparison.

What drives the energy intensity of acute-care hospitals? Acute-care facilities are stringently regulated, complex buildings operating 24 hours a day, 7 days a week and dependent on multiple tiers of mechanical and electrical health and safety systems (GGHC, 2007). In addition to strict regulations covering mechanical ventilation and air change rates, hospitals contain continuously operating diagnostic equipment that generates substantial cooling loads. As a result, even when maximizing efficiency by means of strategies such as “right-sizing” equipment, redundancies must be accommodated to safeguard critical services and provide for future incremental growth and technology changes.

Defining Green Healthcare Projects

According to the Office of the Federal Environmental Executive (White Paper on Sustainability, 2003), green building is defined as “Increasing the efficiency with which buildings and their sites use energy, water and materials, and reducing building impacts on human health and the environment, through better siting, design, construction, operation, maintenance, and removal—the complete building life cycle” (p. 4). Currently, two tools are in use to support the design and construction of green healthcare projects: the USGBC's LEED® third-party green building rating system and the Green Guide for Health Care (Green Guide), a project of Center for Maximum Potential Building Systems and Health Care Without Harm. The Green Guide is a voluntary, self-certifying, best practices green design, construction, and operations toolkit tailored to the healthcare sector (Green Guide, 2007). Nearly 700 projects are registered with one or both systems. As of April 2009, more than 150 projects were registered with the Green Guide; some of these projects are also among the 480 healthcare projects registered with LEED (USGBC, 2009). To ensure that the projects included in this study had a documentable basis to be defined as green, all the selected projects are either registered or certified with the USGBC LEED program.

As of April 30, 2009, 43 healthcare projects had achieved LEED certification (USGBC, 2009). Of these, 13 are acute-care or specialty hospitals, 5 are ambulatory (mixed-occupancy) buildings, and 25 are medical office buildings/clinics (Figure 2). A graph of the LEED certification levels achieved by the 42 healthcare projects certified from 2003 through April 2009 (Figure 3) demonstrates increased activity in the marketplace in tandem with the earlier referenced growth of the Green Guide registered projects. The anticipated launch of LEED for Healthcare in late 2009 is likely to accelerate this trend (Green Guide, 2008; USGBC, 2009).

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Figure 2.

LEED-certified healthcare projects by project type 2003–2009.

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Figure 3.

Level of achievement of LEED-certified healthcare projects 2003–2009.

Defining the Study Projects

Of the current 43 total LEED-certified projects, 10 were selected for inclusion in the study: five acute-care hospitals, two large ambulatory (mixed-occupancy facilities), and three ambulatory care facilities. The study excluded specialty hospitals, long-term care facilities, medical office buildings of less than 10,000 SF, and renovation projects. In addition to these 10 LEED-certified projects, the study data set included three additional, completed, registered acute-care projects awaiting LEED certification for which costs are summarized. This enabled the study to increase the number of acute-care hospitals surveyed, as well as include current data associated with recently completed projects (two of these have achieved certification since the completion of the study and are included in the April 2009 total). The projects selected span large to small facilities, including eight acute-care hospitals, two mixed-occupancy buildings, and three ambulatory care projects.

The 13 projects in this study generally fall within the Commercial Buildings Energy Consumption Survey square footage data for either inpatient healthcare facilities or outpatient buildings, although two mixed-occupancy projects—the Oregon Health and Science University (OHSU) Center for Health and Healing (400,000 SF) and St. Mary's Duluth Clinic (208,000 SF)—bridge the inpatient and outpatient building types in terms of both size and building program. (See Figure 4.) These buildings do not include beds, nor do they operate continuously; however, they do house surgical facilities and extensive diagnostic equipment. OHSU provides ambulatory surgery, while St. Mary's Duluth Clinic offers extensive oncology radiation and diagnostic imaging, chemotherapy, and oncology beds. Hence, their energy intensity profile approaches that of acute-care hospitals.

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Figure 4.

Healthcare projects in this study, organized by size and type.

The Business Case for Green Healthcare

A growing body of literature seeks to quantify green building costs and benefits across multiple building sectors. Beginning as early as 2000, published surveys anticipated the construction cost premiums associated with green building; at this writing, those have largely been superseded by studies examining the actual costs of completed buildings. At the same time, particularly in market sectors with a limited data set of completed buildings, there are multiple market surveys of perceived costs and benefits. This section summarizes the state of the surveys to date; it is not intended to be an exhaustive review of each survey or its findings.

The David and Lucile Packard Foundation commissioned one of the earliest studies projecting the anticipated green building cost premium related to the construction of a new headquarters building (Packard, 2002). The study concluded that the cost differential between a certified LEED facility and a conventional building was less than 1%. A unique aspect of the study monetized the costs associated with pollution: when the cost of environmental pollution was taken into account, the LEED-certified building cost less over 20 years. At the same time, the study projected a relatively linear relationship between increasing levels of sustainability and first cost, a finding that has continued to inform subsequent studies. However, when the costs of pollution are included, the life-cycle costs dramatically decrease with greater reductions in fossil fuel energy use. The study concludes that the lowest life-cycle cost correlates with the highest level of sustainable building (i.e., LEED-Platinum or beyond). Few, if any, subsequent studies have recognized the generally externalized life-cycle costs of pollution.

As the data set of completed green buildings expanded, several later studies quantified the actual construction cost performance of green buildings. Few have specifically addressed healthcare, though key conclusions from more general green building cost studies are relevant to healthcare:

The factors that affect costs have been isolated as follows:

Relative to healthcare, a study by construction cost consultants Matthiessen and Morris (2007) compared the costs of 17 green and nongreen ambulatory care buildings (9 LEED and 8 non-LEED) in their extensive construction cost database to determine whether green buildings cluster in the upper ranges of cost per square foot. Buildings in the sample included cancer treatment centers, ambulatory surgery centers, and ambulatory care centers. Medical office buildings were not included. Although the authors of the study admit that the sample size is insufficient to develop robust statistical data, it was evident that the green buildings fall well within the range of overall sector costs.

Consistent with data from other market sectors, the Matthiessen and Morris survey (2007) found no statistical correlation between increased construction costs and green buildings, reconfirming the earlier Matthiessen and Morris (2004) conclusions:

Few studies have examined the association between first-cost green building premiums and LEED certification level. Early studies projected a relatively straight-line increase in the construction cost premium based upon certification level (Kats, 2003a; Kats 2003b; Packard Foundation, 2002; Turner Green Buildings, 2005). For example, Turner Green Buildings (2005) projected premiums ranging from 0.8% for LEED-Certified buildings to 11.5% for LEED-Platinum achievement. Although the limited initial data seemed to support this notion (Kats, 2003a; Kats, 2003b), Amory Lovins and the Rocky Mountain Institute proposed a powerful countervailing cost model. Lovins (2004) postulated that, although capital costs would increase initially as sustainable building features were added to conventional buildings, an integrated design process would ultimately lead to synergies between building systems that would ultimately drive initial construction costs lower than conventional construction (Figure 5). In fact, the LEED-Gold and -Platinum certified buildings in this study realized some level of synergy that reduced their first-cost premiums.

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Figure 5.

Tunneling through the cost barrier.

At the same time, anecdotal evidence is accumulating that refutes the notion of substantial first-cost green building premiums at all levels of LEED certification. Gerding Edlen, the LEED developer of the OHSU Center for Health and Healing, a LEED-Platinum certified building included in this study, confirms that LEED-certified projects should cost only slightly more than traditional projects:

Survey participant Bill Gladish, Director of Construction for Geisinger Health, confirmed that specific factors contributed to keeping first-cost green building premiums within a manageable range:

On the topic of benefits accrued from green building, the early Capital-E study of completed office buildings in California concluded the following:

In Greening America's Schools, Capital-E (Kats, 2006) documented the costs and benefits associated with green school buildings. A national review of 30 green school projects demonstrated that the first cost of green schools averaged 2% more than conventional school buildings (or $3/SF). Financial benefits ranging from energy and water conservation to health improvements (reductions in the incidence of asthma, cold, and flu) to improved teacher recruitment and retention total $74/SF. Kats summarized his findings as follows: “Building healthy high-performance school buildings is now far more fiscally prudent and lower risk than building conventional, inefficient, and unhealthy school buildings” (Kats, 2006, p. 4).

Two recent surveys of healthcare executives focused on the perceived costs and benefits of green building in healthcare. Building Design + Construction (BD&C) magazine's “Green Buildings Research White Paper” (2007) includes a survey of Green Guide users. When asked how much of a premium they expected to pay for a green hospital, 17% of respondents assumed the premium would exceed 10%; 19% expected a 6–10% premium. The largest single group of respondents (43%) identified the range found in this study: 0–5%. More importantly, 90% of the BD&C survey respondents identified their organizations as incorporating or planning to incorporate green concepts into their capital projects despite the perception of increased capital costs.

The McGraw-Hill Construction and Research Analytics Health Care Green Building SmartMarket Report (2007), based on a survey of healthcare and hospital administrators, reported a lack of consensus around the value of perceived first-cost premiums associated with green building. When asked whether green building burdens construction projects with an unjustifiable cost premium, 36% responded that green building benefits do not justify a cost premium; 24% disagreed with that position; and 40% of respondents were neutral. However, almost 50% of SmartMarket Report respondents expressed the perception that green buildings do not live up to the promise of a return on investment. The report concludes that “lack of knowledge about green techniques” is the most significant barrier to green design in healthcare (McGraw-Hill, 2007, p. 21), indicating that some of the negative responses to their survey may have reflected perceived, rather than real, cost differentials between green and conventional buildings.

More importantly, these survey responses stand in stark contrast to the reported experiences of owners and design teams that engage in and complete green building projects. Respondents in this study believe that green building strategies have become embedded in the definition of a “better healthcare building”; they report that their firms and/or healthcare systems are continuing to raise the level of sustainable design on subsequent projects. Brian Toevs, a partner with the environmental building consultant 7group, describes the transformation of Geisinger Health: “It has gone from ‘Can we get LEED certification?’ to ‘Not only can we get it, but we can get Silver and beyond’” (Brian Toevs, personal communication, July 16, 2008).

Several surveys have focused on the perceived operational benefits associated with green building in healthcare, such as operational efficiency, staff recruitment and retention, and occupant health. Although a growing number of evidence-based studies have established correlations between specific design features such as daylighting and improved patient recovery, evidence for health and operational benefits from green healthcare building practices remains largely anecdotal. Interestingly, findings from the Turner Construction Market Barometer (2005) confirm this anecdotal trend: more than half of the respondents, regardless of whether the respondent worked at a firm with green building experience, expected green buildings to increase building value, and to improve occupant health and well-being, worker productivity, and return on investment.

A University of California at Los Angeles Anderson School study on the diffusion of green building practices reports: “Casual observation and anecdotal evidence indicate a few promising nonmonetary/secondary benefits:

The McGraw-Hill Construction and Research Analytics SmartMarket Report (2007) survey identified the three most common perceived benefits of green building in healthcare:

Values-Driven Design and Construction: Enriching Community Benefits Through Green Hospitals, a white paper sponsored by the Robert Wood Johnson Foundation, concludes that healthcare facilities have begun to identify green building as aligning with their mission to provide healing and community stewardship (Guenther et al., 2006). Although these institutions set goals of improved performance to justify their adoption of green building principles, their executives report that embedding a health-based focus in their approach to green building has positioned them as leaders in their communities, boosted patient satisfaction survey scores, and improved staff recruitment and retention in addition to building performance (Guenther, et al., 2006).

In conclusion, both empirical and anecdotal evidence in the existing body of literature overwhelmingly contradicts healthcare executives' perception that green buildings cost significantly more than traditional buildings. Moreover, research suggests that the benefits derived from direct operational cost savings (e.g., energy, water), productivity, and health gains more than offset the modest first-cost premium required to build green healthcare facilities.

The First-Cost Green Building Premium

Because no industry standard that defines the components of a first-cost green building premium exists, survey participants were given the following working definition to guide their responses: First-cost green building premiums are defined as the additional construction costs associated with design and construction elements included in a project primarily due to their environmental performance, including strategies where additional costs were offset by financial incentives. Project teams were asked to identify both “soft costs” (e.g., commissioning fees, energy modeling, registration and certification fees) and “hard costs” (i.e., premium construction costs associated with the use of a particular material or system). For projects located on designated brownfields, environmental remediation was excluded from first-cost premium calculation because it is a legal requirement. After receiving this basic guidance, each project team was asked to identify the full range of soft and hard costs that were tracked during the project as a first-cost green building premium, both in actual dollars and as a percentage of total construction cost.

The methodology of reporting first-cost green building premiums as percentages of total construction cost has a number of objectives: It attempts to standardize data across buildings of varying size and complexity located in divergent construction markets over a period of 7–10 years, during which the construction industry exhibited significant, albeit geographically uneven, growth (Green Buildings, 2007; McGraw-Hill, 2007). The range of sizes and reported construction costs of the 13 projects in this study is significant—leading to far greater variances in the total dollar amount of first-cost green building premiums than the percentage differences suggest. Nonetheless, this methodology prevails in similar studies conducted in other sectors (Kats 2003a, 2003b, 2005, 2006; Matthiessen & Morris, 2004; Matthiessen & Morris, 2007).

This study reveals variation both in the total amount of first-cost green building premiums identified for each of the 13 projects, as well as the components of the premium. Three of the 13 projects report no first-cost premium after grants and incentives are taken into account; five report premiums of less than 2%; four report premiums in the range of 2–3.8%; and one project, Denver Health Women's and Children's Pavilion, did not calculate a premium (Figures 6A and 6B). Eight projects received utility incentives or dedicated funding that, in each case, was applied to reduce projected premiums. Data in Figures 6A and 7A compare first-cost premiums before the application of funding or incentives. Data in Figures 6B and 7B are based on the net premium numbers, after the application of funding or incentives. Jersey Shore University Medical Center, as of the interview date, predicted that incentives would result in a net savings in construction costs (Michael Pavelsky personal communication, June 30, 2008).

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Figure 6A.

First-cost premiums before incentives by actual or anticipated LEED certification level.

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Figure 6B.

First-cost premiums after incentives by actual or anticipated LEED certification level.

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Figure 7A.

First-cost premiums before incentives by year.

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Figure 7B.

First-cost premiums after incentives by year.

Why did the LEED-Silver projects exhibit the highest first-cost green building premiums? A number of the LEED-Silver certified subject project teams reported relatively late entry into the LEED certification process; they achieved LEED-Silver instead of-Certified by simply adding strategies to the project (and budget). The surveyed LEED-Gold and -Platinum certified projects, on the other hand, entered the LEED process earlier in design, established aspirational goals, and applied astute business strategies to achieve a high certification level at more modest first-cost green building premiums.

The Role of Financial Incentives

Eight of the 13 projects in the data set received grants and/or financial incentives to offset the direct costs of green strategies (Figures 8 and 9). OHSU, a LEED-Platinum certified building, reported the highest amount of financial incentives (Yudelson, 2005). DCMCCT, another LEED-Platinum certified building, also reported receiving a significant financial boost through the CCHP plant partnership with the local municipally owned utility (Phil Risner, personal communication, July 10,2008). Thus the two LEED-Platinum certified buildings both benefited from an aggressive approach to energy management, incentives, and rebate programs. This indicates that a combination of incentive availability and astute business decisions can increase a project's LEED certification level while simultaneously reducing its out-of-pocket first-cost premium by maximizing business opportunities, available grants, and incentives.

This analysis does not recognize the impact of private philanthropy consistently. (Figure 8 categorizes the Center for Discovery Kresge Grant as a green building incentive, but other projects did not necessarily report all philanthropic gifts as impacting their green building premium.) A number of philanthropic foundations now require green buildings as a prerequisite for capital project funding, even for grantees that do not focus explicitly on green building (Jensen, 2008). In fact, the Kresge Foundation (2009) announced in early 2009 that its Green Building Initiative grant program has been so successful in incentivizing green building practices in the nonprofit sector that it will retire the initiative as a stand-alone grant opportunity. Instead, environmental stewardship has been incorporated into the set of nine core values governing all grants awarded by the foundation. Within the subject projects, incentives ranged from a modest $20,000 High-Performance Design Grant from the Colorado Governor's Office of Energy Management and Conservation Rebuild Colorado Program (now of the Colorado Governor's Energy Office) for the Denver Health Pavilion for Women and Children, to $1.6 million for the OHSU Center for Health and Healing from multiple energy efficiency and renewable energy incentive programs.

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Figure 8.

Grants and incentives by category.

For the eight projects that received grants and/or financial incentives, incentive packages often served as a basis for including subject elements as first-cost green building premiums:

Metro Health in Wyoming, MI, identified its green roof and bio-retention swale as the major elements included in the first-cost premium because of the $400,000 Non-Point Source Pollution Grant awarded to the project by the Michigan Department of Environmental Quality (John Ebers, personal communication, July 8, 2008).

OHSU Center for Health and Healing in Portland, OR, also calculated the first-cost premium and payback period for green strategies in relation to grants and incentive programs (Renée Loveland, personal communication, July 7, 2008). The project received over $1.5 million in incentives and tax credits tied almost exclusively to the implementation of energy efficiency, water efficiency, and renewable energy strategies (Yudelson, 2005). OHSU did not ask for a line item cost assessment of premiums associated with other green elements, such as rapidly renewable finish materials. These elements were incorporated into the project as integral to the design goals. However, the project contractor estimates a 1% premium for all green material upgrades (Robert Miller, personal communication, July 2, 2008). Overall, OHSU estimates that grants and incentives reduced its total first-cost green building premium from 3% to 2% (1% associated with energy efficiency, water efficiency, and renewable energy strategies and an estimated 1% associated with green product and material upgrades (Robert Miller, personal communication, July 2, 2008).

Lacks Cancer Center in Grand Rapids, MI, responded to the general green building requirements tied to the philanthropic gift that supplied a substantial portion of the project budget. In particular, the seed funding from local philanthropist Peter Wege that stipulated LEED certification provided both the public support and budgetary flexibility necessary to become the second hospital to achieve that distinction. The holistic approach to designing a green hospital resulted in a calculated first-cost green building premium of less than 1% of total budget.

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Figure 9.

Overall LEED point achievement of projects that received incentives.

Aligning the First-Cost Green Building Premium With Project Objectives

The survey of 13 green healthcare projects included a prioritization exercise. Teams were asked to rank six sustainable design objectives in order of importance to their project: (1) occupant health and safety; (2) climate change impacts; (3) mission/leadership: (4) community benefit; (5) public relations; and (6) operational efficiency. Occupant health and safety, operational efficiency, and community benefit emerged as the three highest-priority objectives (Figure 10); however, most survey participants noted that climate change impacts have a higher level of priority in projects that are initiated today. All projects identified green building as aligned with health system priorities and mission. Likewise, the high-priority objectives often influenced the elements included in the first-cost green building premium. An analysis of these priorities reveals that several elements commonly identified in other sectors as specific to green projects are more likely to be incorporated as standard practice if they fall within the owner's overall project goals and objectives. These findings are supported by the Davis Langdon study: “Many projects can achieve sustainable design within their initial budgets, or with very small supplemental funding. This suggests that owners are finding ways to incorporate the elements important to the goals and values of the project, regardless of budget, by making choices and value decisions” (Matthiessen & Morris 2004, p. 25).

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Figure 10.

Green building priority objectives.

Operational Efficiency—Energy and Water

Subject projects that prioritized operational efficiency (Figure 10) were more likely to incorporate strategies with direct financial payback, such as energy and water efficiency measures. Energy efficiency is generally the first place that building owners—including healthcare executives—look for a measurable return on investment in green building strategies (Green Buildings, 2007; McGraw-Hill Construction, 2007). Collectively, the projects in this data set report a range of projected energy savings from 0–50% among acute-care hospitals, and 15–58% among outpatient and mixed-occupancy facilities (compared to an American Society of Heating, Refrigerating and Air-Conditioning Engineers [ASHRAE)] 90.1 baseline) (Figure 11). Because many jurisdictions exempt healthcare facilities from local energy codes based on ASHRAE 90.1, these facilities may outperform their sector by a higher margin than these projections.

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Figure 11.

Modeled energy savings of study projects (arranged by size of facility).

In general, the subject projects predicted energy demand reductions of less than 30%. For the most part, projects achieved this by optimizing conventional mechanical system design. DCMCCT in Austin (50%) and OHSU Center for Health and Healing in Portland, OR (58.4%) incorporated CCHP systems, displacement ventilation, and other emerging technologies to achieve even greater reductions (Phil Risner, personal communication, July 10, 2008; Renée Loveland, personal communication, July 7, 2008). Examples of energy reduction strategies include:

Both Geisinger Health System projects in the study demonstrate the proven benefits of energy efficiency measures aimed at optimizing conventional system technologies. Both the acute-care facility and an outpatient facility, when compared to a baseline building, achieved an estimated 20% reduction in energy use through an enhanced thermal envelope, increased insulation, high-performance windows, variable-air-volume ventilation system with optimized air flow during off-peak times, high-efficiency variable-speed chillers in the chiller plant, variable frequency pumps for chilled water, reduced lighting power density (a 15% electrical savings by itself), and high-reflectance roof systems (Bill Gladish, personal communication, July 16, 2008). Geisinger Health System has established as standard practice investment in energy efficiency water efficiency, and commissioning strategies with demonstrated benefits to the health system over time. “We're a cost-driven organization; if we're going to spend money, we're going to spend it wisely on strategies that provide benefits for the people we serve” (Bill Gladish, personal communication, July 16, 2008).

Parrish Healthcare Center at Port St. John in Cocoa, FL, a LEED-Silver certified project, projected a 15% reduction in energy use attributable in part to a 5-year “Guaranteed Performance Agreement” with a mechanical systems consultant. This approach allowed Parrish to use life-cycle cost accounting to achieve system upgrades that otherwise may have been considered too high a first-cost premium (Chris Male, personal communication, July 24, 2008).

Acute-care hospitals, generally designed for long life spans (40–50+ years) (Office of Statewide Health Planning and Development, 2005), are more likely to be owner-occupied than are speculative commercial office buildings (U.S. Department of Energy, 2003). As a result, hospital owners should be receptive to longer payback periods for design elements that reduce energy consumption. However, the projects in this study were divided in their ability to couple additional capital dollars with potential operational savings; some organizations were able to manage this financial model, while others reported difficulty converting operational savings to funding for additional capital. This remains an important and provocative issue that profoundly impacts the ability of the healthcare sector to implement advanced technologies and energy demand reduction strategies. Providence Health and Services, one of the subjects in this study, has developed an intriguing approach to crossing the capital-operations chasm (see case study). Many of the projects in this study used some aspect of life-cycle cost calculation to justify investments in energy efficiency measures:

Boulder Community Foothills Hospital in Boulder, CO, accepted a 12-year estimated payback period for key green design elements such as a remote central utility plant. Because of rising energy prices, however, the hospital estimates that its actual payback period has been significantly shortened (Kristi Ennis, personal communication, July 3, 2008).

Oregon Health and Science University in Portland, OR, challenged its Center for Health and Healing project team to deliver an operationally efficient building at a cost savings. As Renée Loveland of Gerding Edlen Development explains:

When we put out the request for proposal for the mechanical engineering design, we asked to achieve 60% energy efficiency at 25% less first cost. The message was that we were looking for efficiency on a grand scale and we were looking for the engineer to be thoughtful and creative, because we felt it didn't need to cost us more. We actually wanted it to cost us less, and we were convinced that if we integrated things well, over the long term, it would prove to be a better operational strategy. (Renee Loveland, personal communication, July 7, 2008)

Although ultimately the project did not realize the 25% first-cost savings on the mechanical, electrical, plumbing budget (it ended up costing about 10% less), after incentives and accounting for trade-offs from standard design practice, the first-cost green building premium hovered at 1% of the construction cost for mechanical elements.

CASE STUDY

Crossing the Capital-Operations Chasm: Providence Health and Services

Providence Health and Services employs life-cycle costing methodologies to make the case for using operational savings to fund the additional capital necessary to purchase energy conservation technologies. After much experimentation, Richard Beam, the Director of Energy Management Services for the Providence Office of Supply Chain Management, developed this simple graphic to convey the impact of reducing energy consumption on the overall margin of the system (Figure 12). After all, healthcare executives are keenly aware that margin propels mission in the nonprofit healthcare community.

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Figure 12.

The amount of revenue needed for the same bottom line impact as $50,000 in operating cost savings given the operating margins of different hospitals.

Simply stated, $50,000 of energy savings delivers $50,000 to the bottom line. Figure 12 illustrates the range of healthcare business revenue that must be generated to deliver the same $50,000 revenue to the bottom line. In essence, the lower the net operating margin of a hospital, the more healthcare service delivery revenue is necessary to deliver a given amount to the margin. At a 2% net operating margin, for example, a hospital must deliver nearly $2.5 million in services to return $50,000 to the margin; in contrast, at an 8% net operating margin, $600,000 of revenue is required. By comparing operational savings to the business revenue required to produce it, the value of operational savings becomes more pronounced.

Using this tool and the energy modeling data, Beam projects the dollar savings associated with proposed energy efficiency measures and applies the corporate hurdle rate of 22% return on investment (roughly a 5-year payback). For example, if the energy model projects a $500,000 per year energy savings, it generates approximately $2.3 million in available capital dollars to use for sustainable design measures. Beam explains,

What the corporation is saying is, if you can initiate energy conservation measures that give us a 22% internal rate of return or better, we will fund them. … We can spend dollars for sustainability and efficiency items up to whatever will fit under that 5-year simple payback. (Richard Beam, personal communication, July 2, 2008)

To perform the analysis, Providence created a Business Opportunity Assessment Team to review all capital projects in excess of $5 million for opportunities to realize operational improvement. Once these assessments began, Beam and his team realized that the energy efficiency measures often were financially achievable for less than the additional first-cost budget generated by the 5-year utility savings (particularly with rising energy costs). He asked to be able to tap the additional capital dollars to pay for elements with no easily measurable operational payback. He continues, “So, if the energy elements pay back in 3 years, we can pay for other elements until we've reached that hurdle limit” (Richard Beam, personal communication, July 2, 2008).

For their LEED-Gold certified hospital in Newberg, OR, Providence Health and Services initially accepted a 5-year payback on green strategies. However, the organization was able to reduce the final return on investment to 14 months by securing a variety of state and utility incentives and a pass-through tax credit. Additionally, as Beam explains, “At Providence, there's always a major effort to include as much energy efficiency into a project as we can afford to do. We model our construction design to see what the potential energy conservation measures might be that we could employ to drive our energy costs down” (Richard Beam, personal communication, July 2, 2008).

To calculate the energy savings and evaluate the use of additional capital that could be generated, Providence instituted a standard design practice—the energy eco-charrette. According to Beam:

Anytime we build a project whose value is $5 million or more, it automatically triggers an energy eco-charrette and an energy modeling exercise. We've proven to ourselves that by paying more capital for enhanced energy systems, on a life-cycle cost basis, we create an energy savings value stream of dollars over the operational life of the equipment, or the operational life of the building. However you measure it, that value stream provides a solid return on investment.

To succeed, you need to recognize life-cycle costing as a valid approach, and consider it equivalent to first cost. And so, when you make a decision about whether you're just going to put in code-compliant energy equipment or something better, you need to do a life-cycle cost analysis as part of the energy modeling exercise. That tells us what we can afford to put in the project that'll drive us the maximum amount of operational savings over the life of the building, which is what we try to then implement in the construction plan. (Richard Beam, personal communication, July 2, 2008)

The topic of commissioning produced variable responses with regard to inclusion in first-cost green building premiums. Few if any subject projects included fundamental commissioning in their first-cost green building premiums, indicating that commissioning has become standard practice. Conversely, several design teams identified enhanced commissioning as a premium. For example, Jersey Shore University Medical Center in Neptune, NJ, isolated only portions of enhanced commissioning as a green building first-cost premium (Michael Pavelsky personal communication, June 30, 2008). As Michael Pavelsky, Sustainability Director with the She-ward Partnership, explains,

The owner's baseline requirements for fundamental commissioning were far above the LEED requirements and protocols. Every single variable-air-volume box is tested. Every single connection is tested. It is a 4-month process. So, the contractor had an entire staff in place for the commissioning from the beginning. In addition, we brought in a third party to both oversee all of their activities and serve as the enhanced commissioning representative.

Finally, additional costs associated with renewable-energy or “green power” electrical utility purchases were not universally treated as part of the first-cost green building premium by subject projects. In some instances, projects excluded “green power” purchases from the premium calculation because they viewed it as a contract above and beyond the bricks-and-mortar building. In other instances, particularly where achieving green power-related LEED points elevated projects to a higher LEED certification level, the cost of the green power contract was included in the reported first-cost green building premium calculation.

On-site renewable energy often carries significant capital cost. Its cost, however, was generally included in reported first-cost green building premium calculations unless it was substantially offset by utility incentives or when it was achieved through lease-back arrangements, as demonstrated by the following projects surveyed:

The OHSU Center for Health and Healing in Portland, OR, isolated its 60 kW photovoltaic array as a first-cost premium element that required grants and incentives. The project successfully offset most of the cost of the array by means of the State of Oregon Business Energy Tax Credit, the Oregon Energy Trust, and the sale of renewable energy credits generated by the system. The array, generating 50,000 kWh net per year, comprises building-integrated photovoltaic electric panels mounted in the sunshades located on the south façade of the building. According to developer Gerding Edlin, the sunshades actually save as much energy as the photovoltaic panels produce (Renée Loveland, personal communication, July 7, 2008).

Four years after achieving LEED-Gold certification, Boulder Community Foothills Hospital in Boulder, CO, installed two photovoltaic solar arrays on its medical campus totaling 75.35 kW and offsetting 103,888 kWh of electricity, representing less than 5% of the total annual electricity use of the hospital. By engaging in a power purchase agreement with the solar installer, whereby the installer “rents” space on the roof in exchange for the hospital agreeing to purchase the power generated by the photovoltaic arrays, the premium associated with this installation was negligible (Kristi Ennis, personal communication, July 3, 2008).

Nine of the 13 projects studied achieved 20% or more potable water reduction in fixtures such as sinks and toilets. The OHSU Center for Health and Healing instituted a comprehensive water use reduction strategy, including an in-building membrane bioreactor that treats all gray- and blackwater on site and routes it for reuse in toilet flushing, irrigation, and cooling tower make-up to achieve a reported reduction of more than 50% in total potable water usage (Yudelson, 2005). Although a reduction in domestic water usage (i.e., in fixtures) is laudable, it may not produce as significant a water savings in acute-care healthcare facilities, where roughly 60% of water is used for building processes such as the mechanical system and to cool sterilizer equipment (Massachusetts Water Resources Authority, 1996).

Currently, the most cost-effective large-scale water efficiency strategy is to recycle process water through a closed-loop system and reuse it for limited irrigation and in cooling towers (Massachusetts Water Resources Authority, 1996). Providence Newberg Medical Center in Newberg, OR, achieved a reported 20% reduction in fixture water use compared to a conventional building by installing low-flow fixtures, and an estimated 30% reduction in process water use by means of strategies such as dishwashers that recycle final rinse water as pre-rinse water for the next cycle.

All of the subject projects reduced potable water use for landscape irrigation by at least 50%, with a 100% reduction for all of the outpatient projects.

Metro Health in Wyoming, MI, the only project to include captured rainwater landscape irrigation systems in its reported first-cost green building premium calculation, received a $400,000 Non-Point Source Pollution Grant from the Michigan Department of Environmental Quality to install a vegetated roof, to dredge stormwater retention ponds for irrigation water, to upgrade stormwater controls, and to monitor the effectiveness of stormwater retention ponds in filtering pollutants (John Ebers, personal communication, July 8, 2008). As John Ebers of Metro Health explains, the retention ponds that supply water for irrigation were actually viewed as a cost savings:

The hospital sits on a 170-acre development called the Metro Health Village. One of the things that we looked at early on was putting in rain vaults underneath the hospital for a cost of approximately $575,000. Instead, we constructed two ponds at the entrance of the Village that receive runoff from 50% of the site, paid $45,000 for pumps that provide irrigation water to both the hospital and the rest of existing tenants and future tenants in the Village. … In the deed restriction for the site, all of the buildings have to achieve minimum LEED certification. So this is something they can check off their checklist and say, “Alright, we already have that credit.” (John Ebers, personal communication, July 8, 2008)

Conclusion

As evidenced by this survey study, the question of first-cost green building premiums in healthcare is complex and challenging and deserves continued study and tracking. The complexity of the undertaking resists simple categorization and conclusions. The data in this study corroborate the findings of earlier, well-regarded industry business case efforts (Kats, 2003a; Kats, 2003b; Kats, 2005; Kats, 2006; Matthiessen & Morris, 2004), with the exception of predicting increased first-costs related to the level of LEED certification.

Many of the healthcare organizations in this study did not decide to pursue green building based on financial calculations; instead they were motivated by the values of leadership and community benefit. However, one healthcare-specific lesson learned stood out in reports from the vast majority of projects: the more emphasis an owner placed on the connection between the benefits of green building and occupant health and safety, the more sustainable building elements were integrated into the project as basic building features.

First-cost green building premiums appear to be lower than industry expectations (Green Buildings, 2007; McGraw-Hill, 2007) and may be decreasing over time. Certainly, study projects demonstrated that green elements previously viewed as above-standard are being incorporated into projects as a new baseline definition of best practice healthcare construction.

Ultimately, however, the topic of first-cost green building premiums, although useful for comparing industry data, presents a one-dimensional view of a complex, multilayered topic. Kristi Ennis of Boulder Associates explained that the integrated design process for Boulder Community Foothills Hospital disregards any attempt to calculate a first-cost premium specific to green design elements: “Because of the integrative design process, elements of the project were incorporated if they met several criteria: they might be green, but they were also low maintenance or met criteria for infection control, etc.” (personal communication, 2008). Peter Syrett of Perkins + Will, referencing the Center for Discovery in Harris, NY, agrees:

The concept of a first-cost premium inherently presents an item as a premium when it isn't necessarily an add to the budget—and in a process where we are not asked to analyze the subtractions. If orienting a building to optimize passive solar gain in winter reduces heating load with no impact on construction cost, where is that “savings” tracked? (Peter Syrett, personal communication, 2008)

Clearly, the work ahead is to develop a more comprehensive model for tracking cost and savings using an integrative design model. As this model emerges, it will be necessary to continue to reference the healthcare sector's triple-bottom line values and their commitment to occupant health and safety, operational efficiency, and community benefit (Guenther, et al., 2006). The healthcare sector deserves no less in a continuing analysis of this topic.