Cool Photos from Depositphotos
By Aaron Stahl, CEO of P3 Cost Analysts
Hospitals need electricity, water, and gas services to function like any business. However, what sets hospitals apart from other organizations is the amount of these utilities they use. Take electricity, for example. Lighting, heating and cooling systems, air filtration, special machinery and more, all require massive amounts of energy to operate. By some estimates, the average U.S. hospital uses 31 kilowatt-hours (kWh) of electricity per square foot annually. With most hospitals requiring more than 2,000 square feet of space per patient bed, you can begin to imagine how large electricity bills are for even the smallest community hospital. When you add in natural gas, water and other critical services, the true scope of hospital utility spending begins to emerge.
Utility Costs Are Not Always Fixed
Faced with these daily costs, it’s not surprising that hospital administrators would search for opportunities to curtail utility spending. In most cases, these efforts begin by reducing consumption. While conservation initiatives are a good business practice, hospitals often miss other savings opportunities because they mistakenly believe that utility costs are fixed.
It’s easy to understand why hospitals would have this fixed-cost assumption. After all, the energy industry is highly regulated, and providers often enjoy comfortable monopolies within their service areas. However, that doesn’t stop providers from making frequent billing errors and overcharging their customers. Unfortunately, utility billing practices are so complex that most hospitals never detect these mistakes in the first place.
The Role Tariffs Play in Utility Costs
Energy suppliers and utility companies have different tariffs that govern what they can charge, even in most deregulated markets. These tariffs dictate how much organizations pay based on their industry type, usage, time of usage and many other factors outlined in lengthy and complex documents that certainly aren’t user-friendly. Consequently, it’s nearly impossible for non-experts to understand how energy suppliers apply these tariffs or if they’re applying them correctly.
For example, suppose a hospital qualifies for a lower billing tier if 40% of their energy usage comes from natural gas. However, this incentive only applies if the hospital uses that natural gas at certain times of the day. Under these circumstances, the hospital needs to be aware of the incentive and have the right tracking systems in place to qualify for the savings.
Common Utility Billing Errors
Besides being nearly impossible to decipher, overly complex utility tariffs also open the door for billing errors. However, uncovering these errors requires a deep historical audit by someone with extensive knowledge of utility billing practices. Here are a few examples of common electrical, water, and gas billing errors these audits uncover.
Electrical Billing Errors
Hours Used Error
Energy suppliers define hours used as the number of hours a customer used their electricity based on their peak demand. However, it’s not uncommon for suppliers to charge for an impossible amount of usage. For example, in a 30-day billing cycle, there is a maximum of 720 hours (24 hours x 30 days). If a supplier bills for more than 720 hours in a 30-day billing cycle, it’s an impossibility, which signals an error.
Estimated Demand Error
Utility companies are allowed to estimate bills based on the history of a business’ electrical usage. However, if suppliers don’t read electrical meters correctly, they will establish estimated demand on inaccurate historical use. This error can only be uncovered through a close review of past billing statements.
Misapplied Demand Ratchets
A demand ratchet is the percentage of peak demand that an organization has to pay each month, even if they don’t use that energy. By understanding demand ratchets, hospitals can change their usage to avoid triggers that bring them into a higher kilowatt charge tier. Without making these changes, hospitals often fall into a higher ratchet than they need to be and pay higher energy costs as a result.
Water Billing Errors
Incorrect Sewage Billing
Sewage billing is based on a percentage of water consumption, which in many states is 100%. However, some organizations use large quantities of water that aren’t always going back into the sewer. In such cases, they shouldn’t be charged 100% for sewage based on how they use their water.
Meter Reading Errors
Many municipalities use computers to read water meters. However, overcharges can occur if the data is not entered into the computer correctly on the front end or if the computer makes an error.
Gas Billing Errors
Most gas billing errors come from the utility company not billing based on the terms of the contract. If the customer doesn’t catch this error, they’ll pay more than they have to for gas services.
Automatic Tariff Changes
In some cases, tariffs change automatically based on usage. Generally, these changes move the customer to the most cost-effective rate. However, these automatic changes routinely fail to occur, which means many gas customers pay more than they should for their service.
Take the Next Step
With thousands of employees serving thousands of patients around the clock, few organizations are more complex than hospitals — or more expensive to operate. The utilities that make those services possible are even more complicated and add tremendous ongoing operational costs to a hospital’s critical mission. It’s true that controllers and accounts payable departments have their eyes on utility expenses, however they may not have the knowledge or the time necessary to review every single possible mishap to ensure hospitals aren’t overpaying for utility services.
And while reducing wasteful practices by improving conservation efforts is a significant first step, administrators can do so much more. By digging deeper into utility bills and contracts, administrators will uncover considerable savings opportunities that add to the bottom line. As a result, administrators can reduce costs they once thought were fixed and put more of their resources back into caring for patients.
About the Author: Aaron Stahl is the CEO of P3 Cost Analysts, an expense auditing firm that has been helping companies across the nation determine if their spending on utility, telecom, waste and recycling, merchant processing, uniform/linen, managed print, and property tax expenses are cost effective since 1991. More than 90% of P3 Cost Analysts’ clients have realized savings and/or refunds from the firm’s expert auditing.