ESG for Healthcare Organizations: Opportunities and Potential Challenges
BRG's Robin Cantor and Mike Fine from Wyatt, Tarrant & Combs discuss how environmental, social, and governance (ESG) factors are impacting the healthcare sector and opportunities and challenges healthcare organizations face in meeting ESG standards and challenges.
Transcript
[00:00:00] Robin Cantor: Hello, my name is Robin Cantor. I'm a managing director in the BRG Washington, DC, office. In this episode, I'm going to be speaking with Mike Fine, a partner in the healthcare service team at Wyatt, Tarrant & Combs. Mike focuses his practice on issues impacting tax-exempt organizations, largely hospitals, also private foundations, social welfare organizations, colleges, and universities. He previously served as chair of the American Health Law Association's Tax and Finance practice group.
In this episode, we'll discuss how environmental, social, and governance factors—better known as ESG factors—are impacting the healthcare sector and the opportunities and challenges healthcare organizations face in meeting ESG standards and challenges. Traditionally, the healthcare organizations have focused on the S, or social part, of the ESG equation, addressing racial and social inequities across the healthcare system. But considering that the healthcare sector accounts for a substantial share of emissions from energy use and waste, the environmental impact of healthcare has not received as much focus. And even though social and governance objectives often can be met by implementing environmentally sustainable projects and practices, this hasn't really been looked at in the way you would think it would have been focused on.
So, Mike, I want to thank you for being here.
[00:01:32] Mike Fine: Well, thanks for having me, Robin.
[00:01:35] RC: So, I'm going to present some information as background before we get into the main substance. Just so folks know, the US healthcare system is responsible for an estimated 10 percent of national greenhouse gas emissions. It's also responsible for a fairly large share of what are known as consumption expenditures, accounting for more than $4 trillion in expenditures and about 20 percent of US GDP. And the biggest area of greenhouse gas emissions by expenditure category is hospital care, counting for about 35 percent.
As we've been focusing on environmental projects and emissions, an accounting framework has been developed and pushed for trying to focus on the measurement of emissions. And typically, these emissions are characterized as Scope 1, which is facility fuel and generation; Scope 2, which is purchased electricity; and Scope 3, which is all the emissions from the supply chain. Which is important for healthcare organizations because more than 80 percent of their emissions come from the supply chain.
And as noted, traditionally healthcare organizations have focused on the S or social part of ESG, but there are many efforts now underway at Health and Human Services, National Academy of Medicine, CMS, the Department of Energy, Environmental Protection Agency, and other regulatory and industry organizations, which have really expanded their focus on the E performance, especially for healthcare.
So for example, Health and Human Services has a health-sector climate pledge that was reopened this year to accept new signatories. And in 2022, there were approximately one hundred organizations representing about 840 hospitals that had signed the pledge. This pledge does commit the organization to, at a minimum, reduce their organizational emissions by 50 percent by 2030, and that's using a baseline no earlier than 2008, and achieve net-zero emissions by 2050, and publicly account for that progress on the goal every year. They also have to designate an executive-level lead for their work on reducing emissions by 2023 and conduct an inventory of those Scope 3 emissions that I mentioned earlier about the supply chain by the end of 2024. And they have to develop and release a climate-resilience plan for continuous operations by the end of 2023, anticipating the needs of various groups in their community that experience disproportionate risk of climate-related harm.
In a related effort, Health and Human Services and the National Academy of Medicine launched the Action Collaborative on Decarbonizing the US Health Sector, and it's a public–private partnership of healthcare leaders committed to addressing the section's environmental impact while strengthening its sustainability and resilience.
But we all know that hospital margins are already stretched thin and following through on capital intensive environmental initiatives can be very costly. Since financing is often one of the biggest constraints for nonprofit healthcare organizations undertaking these projects, I'll ask you, Mike, what opportunities can they capitalize on to ease the burden?
[00:06:20] MF: There are three things I want to talk about, and first is HUD's office of residential care facilities, which oversees Section 232 of the National Housing Act. Under that program, the Federal Housing Administration provides a loan product that offers mortgage insurance for residential care facilities. These are things like long-term nursing, skilled nursing facilities. Mortgage insurance rates for those who participate in the program are substantially reduced as long as they're using that funding to promote healthy, green, energy-efficient facilities. We expect to see similar rules for hospitals.
So, I talked about section 232 of the National Housing Act. Well, there's Section 242 that focuses on acute care hospital facilities. But to our knowledge at this time, HUD's Office of Hospital Facilities has not yet updated its rules. So that's one existing opportunity, but it could become a new opportunity.
Another existing opportunity are new-markets tax credits. These credits are not limited to healthcare. They're not focused on decarbonization, but they can support those goals by attracting private investment targeted to low-income and underserved communities. Investors receive substantial tax benefits, and the healthcare organizations receive favorable borrowing terms for these projects, and that can include building a new hospital. So don't forget about new-markets tax credits.
And lastly, I have to mention the Inflation Reduction Act of 2022, right? We're only about one year removed, and it's already had a profound impact. IRA expanded existing tax deductions related to energy-efficient buildings. It added credits to encourage investment in renewable energy generation, energy efficiency, emissions reductions, and EVs [electric vehicles].
A few key terms under the IRA with which you should be familiar here are the investment tax credit (ITC) and the production tax credit (PTC). These allow taxpayers to deduct a percentage of the cost from renewable energy systems from their federal taxes. So, ITCs apply to upfront purchase of parts and materials and labor and energy property. PTCs are eligible for direct payments and apply to production or output of electricity from renewable energy sources. There are certain projects for which you could either seek ITC or PTC—projects like solar and wind—but you can't claim both. You have to choose: Is it one or the other? And there are other projects like geothermal and fuel cells that are eligible only for ITC or like biomass and landfill gas that are only available for PTC.
Now, under IRA, there's a direct-pay option that allows tax-exempt entities to claim these and receive a payment from the government, potentially. Before, a tax-exempt entity that provided healthcare would have to have unrelated business income and use the credits against the taxes that were owed. Direct pay levels the playing field for tax-exempt healthcare organizations and certain governmental organizations as well.
[00:10:35] RC: That seems particularly important. And I guess the next question that I want to ask you is: Do you have any examples of hospitals that are taking steps to improve their environmental performance as part of the ESG objectives? You know, what can other healthcare organizations learn from these efforts?
[00:10:54] MF: Yeah, absolutely. And we see some of this from news stories. UC Medical Center, Irvine just built a brand-new hospital that is all electric. And it features all the essential utilities but has no carbon combustion or natural gas. There are decarbonization tech firms that specialize in healthcare with which healthcare organizations can work, like Mazetti. They build strategies for clients to help implement sustainable strategies.
CommonSpirit Health, one of the largest healthcare organizations in the US. It has something like 125,000 employees, 25,000 doctors. They operate over about 140 hospitals. They've adopted a goal of achieving net-zero emission by 2040. That's in line with the US goals under the Paris Agreement, the international treaty on climate, and it's a very aggressive one. In 2020, CommonSpirit Health began the process of retro-commissioning some of its acute care facilities to reduce their energy use. It also started focusing on renewable energy initiatives, increasing the use of solar power. There have been stories about some of the work they're doing in modern healthcare. They're updating their energy grids to use more renewable sources. They're installing LED lights throughout their campuses in emergency rooms.
But so much of the emissions for which hospitals are responsible come through their supply chain. And that's something you cited earlier, Robin, in talking about the Scope 3. CommonSpirit is working with its vendors to reduce their climate footprint. And it’s even asked, for example, the IV bag vendor that it uses to remove a chemical from their manufacturing process that's been linked to male infertility.
I don't want to just talk about CommonSpirit though. There's another great example, Gundersen Health System in Wisconsin. They have worked with a La Crosse County landfill to heat their medical clinics using the methane that's produced from that landfill. That saves them about $800,000 a year. They've also installed new solar paneling across their patient parking lots. The beauty of these projects is that they save money over the long term. And it frees up resources in the future so that healthcare facilities can make the investments now and then, in the future, use those savings to invest in patient-centered activities going forward.
[00:13:43] RC: That's just a great example. As we wrap up this episode, do you have any parting thoughts for the future of ESG and healthcare?
[00:13:52] MF: I think ESG is here to stay. We're talking about human capital. We're talking about climate issues, sustainability, supply chain management—all of these things are interrelated. And it's all about risk and risk mitigation. Boards of directors have figured this out. They know it's their responsibility to oversee the healthcare organization to manage those risks and to manage that, especially given the prevalence of extreme weather. We've got tornadoes. We've got floods. We've got wildfire. They're right now in Florida. We're recording in late August. There's massive storm surges they're expecting.
So, it's become imperative for healthcare organizations to find ways to reduce their reliance on others to support their operations. That might mean creating your own power grid so that you can continue to provide care when emergency strikes.
How about you, Robin? What do you think lies ahead for healthcare organizations looking to mitigate the impact of climate change?
[00:15:02] RC: Well, I do think that there has been a major shift in people thinking about the connection between the E and the S of ESG. And I think the other thing that's so important is that organizations at all levels are really developing the data and the analytical support for the measurement capabilities that effective commitments to ESG targets will require. I think expanding resources provided by IRA and other funding sources will help accelerate the improved climate-related resiliency in the healthcare industry.
So, Mike, thank you so much for participating in this podcast with me. And I really appreciate the perspective you bring on this and also the attention to what's really happening out there with healthcare organizations. So, thank you very much for joining us today.
[00:15:56] MF: It's a pleasure to be with you, Robin.