Hospital infrastructure project funding strategies

Key infrastructure updates need to be identified and prioritized within the context of overall hospital facility operations.

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Health care organizations are feeling the impacts of persistent inflation. Add to that the labor shortages with which the health care field has been grappling for the last five-plus years, the supply chain impacts left over from COVID-19 and a population that is changing how, when and where to seek care, and it is safe to say hospital budgets have been seriously impacted.

The funny thing about building operations is that they don’t pay attention to things like inflation, the supply chain or staff retirement. Life cycles end, parts break, systems require inspection, testing and maintenance activities, and system upgrades become a necessity regardless of what is happening in the world in which the building exists. 

So how do facilities directors position themselves for success when traditional funding methods for infrastructure projects don’t materialize?

Generating funds

Health facilities directors spend countless hours developing their operating budgets for presentation to the CFO each year. And, all too often, approved operating budgets do not include much-needed infrastructure project dollars. 

Recent trends have shown operating budgets reduced in ways that only cover what has been deemed essential operations. The resulting budgets do not include project dollars for proactive improvement of the infrastructure. 

In a trend that has become too common, infrastructure improvement requests lose out to other revenue-generating opportunities identified by other departments. As the process of allocating capital budgets gets tighter and more competitive, it is no surprise that infrastructure upgrades get pushed aside.

So, what is a facilities director to do? Experienced facilities directors will say the path forward begins with prioritization efforts. Key infrastructure updates need to be identified and, most importantly, prioritized within the context of overall hospital facility operations. To make a solid case for an infrastructure upgrade project, reliable and current data is necessary.

One option that is often overlooked during the prioritization process is how infrastructure upgrades can generate funds for and through the operating budget. Developing a plan to generate funds through operational upgrades will get the attention of the financial decision-makers if the plan is clear.

Alternative funding

The federal government is a large source of “free money.” Now everyone knows that there really is no such thing as free money, but there are ways to gain access to funding that has been set aside specifically for these types of projects. To do so, one must first know what kinds of programs are available. They are discussed below:

Grants. A government grant is a financial award given by a federal, state or local government authority for a project that is deemed beneficial. A private grant is a financial award given by private foundations or entities for specific purposes.

Grant programs appear to be a great resource at first glance. However, grant programs tend to be the least used alternative funding source today. While being selected for a grant provides a source of free resources to fund a project, there are several drawbacks.

Grant applications can be lengthy and often require a lot of information that may or not be available, based on where the project is in the design process. The decision to apply for a grant often comes with the need to have staff members who are familiar with navigating the application and submission process. Those same staff members need to be knowledgeable about the organization and the project work for which the grant is being sought.

Most facilities do not have staff members with a background in grant writing. The competition for grant dollars can be fierce. Because free funding is at stake, there are a lot of entities that pursue grants. The amount of effort required to complete and submit a grant application is sometimes not worth the chance the organization has at being awarded the grant.

The most notable drawback is that grants take a long time. Construction schedules wait for no one. Counting on grant funding can pose a risk to project completion.

This is not to say grant programs are bad or should not be considered, but simply to identify the tradeoffs that must be considered when pursuing this avenue of alternative funding. Hospitals should watch for easy access grant opportunities in their areas.

Tax credits. A tax credit is a benefit the government offers that is given to reduce the total tax liability. Tax credits reduce the tax liability on a dollar-for-dollar basis.

Until recent legislation, tax credits have been only available to for-profit entities. Because most health care organizations are not-for-profit 501(c)(3) entities, this pool of funding has historically been out of reach. However, over the past few years, Congress has passed several pieces of legislation, including the American Rescue Plan, Infrastructure Investment and Jobs Act and the Inflation Reduction Act (IRA), that provide billions of dollars in the form of grants, loan programs and tax credits to help offset the cost of infrastructure projects.

There are several opportunities to take advantage of these tax credits and programs within the health care sector. A sidebar in Health Facilities Management magazine’s April 2023 cover story highlighted the IRA benefits for hospitals.

State-sponsored grant, tax and rebate programs are another source of alternative income that can be explored. These programs offer an opportunity to fund projects through state-allocated dollars that will provide a return within the state as well as support state-level priorities, policies and public interest. One significant advantage to state-sponsored programs is that the competition is reduced because applicants are limited to those within the state. Availability of state programs varies significantly. It will take some research to determine if a particular state has any available programs.

For example, Wisconsin’s Public Service Commission is offering an energy innovation grant program, which is accessible at https://bit.ly/3U5LKsj. Hospitals are specifically eligible, including public, non-profits and 501(c)(3) non-profits. The purpose of the program is to support energy projects that are related to energy efficiency, renewable energy, energy storage and energy planning. Facilities are required to apply and provide supporting documentation through the Public Service Commission’s grant system.

Health care facilities that are interested in state grant opportunities have resources available to them. The Database of State Incentives for Renewables and Efficiency (DSIRE) is a source of information on incentives and policies that support renewable energy and energy efficiency opportunities that is searchable by state. DSIRE is operated by the NC Clean Energy Technology Center at NC State University, Raleigh, N.C.

Utility rebates. A utility rebate is a return of a portion of a payment in the form of a credit or cash back. Rebate programs are offered by energy service companies or utility providers to help their customers apply and qualify for various cash returns on new energy-efficient infrastructure projects.

Utility rebates and incentives are the most popular and widely used alternative funding sources for health care facilities today. Almost every facilities manager who engages in infrastructure discussions mentions projects that involved collaboration with their utilities provider.

Electric and natural gas utility providers have an obligation to the states in which they operate to help facilitate building energy efficiency updates within the community. Utilities providers are always looking for ways to reduce demand and lessen strain on the grid. This creates a strong incentive for utility providers to work with significant consumers, like hospitals, to move energy efficiency programs forward.

There are typically two different kinds of programs offered for commercial buildings — service incentives and cash rebates. An incentive is used to encourage a facility to move forward with a project they may have otherwise not pursued while a rebate is cash back.

Service incentives usually involve a third party to provide technical services like retro-commissioning or energy assessments. Cash rebates involve statement credits or cash back to the organization based on the energy impact of the new energy-efficient equipment or service.

Utility rebate and incentive programs are available to new construction projects as well as existing system upgrade projects. When embarking on a new construction project, it is important to engage with utility providers during the design development stage.

This will allow the manager to maximize all the design options available and make informed decisions about equipment choices. Waiting too long to engage with the utility provider can mean missed opportunities for longer-term savings.

Other options. When discussing alternative funding sources with facilities directors across the country, a couple of other alternatives come to light. 

For example, several large hospital networks have developed infrastructure dollar set asides. These are separate budgets that are dedicated to infrastructure projects within their corporations. This puts one facility up against the others within the system to vie for the current year’s dollars. This is where prioritization, supporting historical documentation and a return-on-investment plan can really help a facilities director stand out among their peers.

Health care systems across the country also have made public commitments to reduce consumption, lower their carbon footprint and work toward net zero. “Green dollars” are funds set aside by hospital corporations that are dedicated to achieving these goals. Knowing what commitments an organization has made — and the date by which they need to be achieved — can help facilities directors leverage access to these kinds of funds to advance infrastructure upgrades and replacements.

Health care facilities managers also should strongly consider participating in the Environmental Protection Agency’s ENERGY STAR^® program if they are not already doing so. ENERGY STAR has developed a free program called ENERGY STAR Portfolio Manager, which is an online energy tracker and benchmarking tool that hospitals can use to track and assess their overall energy and water consumption.

This tool is a great way to identify underperforming buildings, develop investment priorities and confirm efficiency results. The program works hand-in-hand with ASHE’s Energy to Care^® program. Data is shared between the ENERGY STAR Portfolio Manager and the Energy to Care system to create dashboards that can be used to share valuable information with the hospital’s C-suite while more thoroughly managing the use of energy. These are keys that can unlock more capital infrastructure dollars. 

Getting operational funding

The reality is that CFOs are more likely to spend capital dollars investing in a new MRI machine than they are a new boiler or chiller. However, the new boiler or chiller is still a needed expense to keep the hospital operational, so the dollars must come from somewhere.

Fortunately, there are alternative funding sources available to those who seek them out. Alternative funding sources like grants, tax credits and utility rebates can help offset the full cost of the project.

Facilities managers should talk with their peers in health care about successes and hardships they have had. They should have a plan to generate funds through operational budgets, like utility cost savings through LED conversion or utility consumption savings through a chilled water equipment replacement with significantly higher energy efficiency.

Once a manager can show that a facility can generate revenue and returns, getting future operational funding approved will be easier.

Military infrastructure projects

Military treatment facilities face the same uphill budget battles as public hospitals. If getting a budget request approved by the C-suite seems daunting, imagine having a budget request approved by Congress.

Facilities directors at military health care facilities face budget uncertainty on a regular basis. Like public sector health care organizations, military facilities need to plan for infrastructure upgrades and seek other funding sources to supplement budget gaps for these types of projects.

The federal government has a program in place to centrally fund major energy-related projects called the Energy Resiliency and Conservation Investment Program (ERCIP). This program sets aside military construction dollars for the sole purpose of funding infrastructure projects that will help improve energy resilience, reduce energy costs and support continuity of the installation’s mission. Program goals are accomplished through the modernization of existing systems as well as through construction of new, high-efficiency energy systems and technologies.

While military treatment facilities have to compete with all Department of Defense buildings for funds, a good case can usually be made for infrastructure upgrades given the energy consumption rates of medical facilities compared to lower-use structures. Approved projects include several microgrid installations, photovoltaic array and battery storage installations, on-site generation plants and electrical infrastructure installations.

In addition to utilizing the ERCIP, military treatment facilities can use energy savings performance contracts to help fund needed infrastructure project work. This allows the facility to secure energy savings and facility system upgrades with no upfront capital costs or additional dollars from Congress.

By partnering with an approved energy service company, a facility can upgrade critical infrastructure while returning the savings over an established time frame. This is another example of collaborative efforts that can produce additional revenue opportunities for facilities. 

Anne M. Guglielmo, CHFM, CFPS, CHSP, SASHE, LEED AP, is Defense Health Agency health care accreditation manager at Nika Solutions, San Antonio. She can be reached at aguglielmo@nikasolutions.com.