St Dismas Assisted Living Facility1 St Dismas Medical Center

St. Dismas Assisted Living Facility—1

St. Dismas Medical Center, an urban, nonprofit, 450 bed rehabilitation hospital began to

see a significant decline in admissions. St. Dismas\' mission focuses on inpatient and

outpatient rehabilitation of the severely injured and catastrophically ill. While the patient

census varied from month to month, it appeared to the St. Dismas Board of Trustees that

the inpatient population was slowly but steadily declining. The hospital\'s market

researchers reported that fewer people were being severely injured due to the popularity

of seat belts and bicycle/motorcycle helmets. In order to get a handle on the future of the organization, the Board, and theCEO, Fred Splient M.D. called for a major strategic

planning effort to take place.

In January 1999, St. Dismas held a planning retreat to identify future opportunities. The

outcome of the retreat was that the Medical Center needed to focus its efforts around two major strategic initiatives. The first, a short run initiative, was to be more cost

effective in the delivery of inpatient care. The second, a long-run strategy, was to develop new

programs and services that would capitalize on the existing, highly competent rehabilitation therapy staff and St. Dismas\'s excellent reputation in the region.

At the time of the retreat, Fred Splient\'s parents were living with him and his family. Fred

was an active member of the “sandwich generation.” His parents were aging and

developing many problems common to the geriatric populace. Their increased medical

needs were beginning to wear on Fred and his family. It crossed Fred\'s mind that life

might be more pleasant if the hospital Board approved an expansion of the Medical Center\'s campus to include an assisted living facility.

In March 1999, Fred had his Business Development team prepare a rough estimate of the

potential return on investment of an assisted living facility. He asked the team to identify

different options for facility construction and the associated costs. The team also did a

complete competitive analysis and examined the options for services to be offered based

on St. Dismas\'s potential population base and catchment area. The Business Development

team visited several facilities across the country. The team also interviewed companies

that could oversee the design, building, and operation of the facility for St. Dismas. The

development team produced a preliminary business plan based on the recommended

structure for the facility, estimated capital expenditure needs, estimated income from

operation of the facility, as well as projected revenues to other Medical Center programs

resulting from the facility\'s population.

The plan was presented at the May 1999 meeting of the Board of Trustees. Fred Splient

and his team introduced the Board to the concept of opening an assisted living facility on

St. Dismas\'s campus. The facility would be set up as a for-profit subsidiary of the Medical Center so that it could generate a profit and not be subjected to the strict guidelines of the hospital\'s accrediting agencies. As a subsidiary organization, however, the Board would still have control.

The chosen facility design was a freestanding apartment-

like facility with a sheltered connection to the Hospital for access to the kitchen and hospital services. The facility would have 100 units with 15 to 30 of the units classified as “heavy-

assisted” and built to code to house the physically and medically disabled. The rest of the units would be “light-assisted,” larger apartments. The population would be approximately 110 to 150

residents, with most being single occupants rather than couples.

The light-assisted apartments could hold residents who required only minor medical and

social interventions. The residents of the heavy-assisted section would have more medical

needs and would require assistance getting around. The Business Development team

recommended this type of programming model, because many assisted living facilities

were erected across the country, but few had a medical focus and offered the types of

services that St. Dismas could offer—physical and occupational therapy programs, and

behavior management programs to name a few.

The Board was assured that the facility would meet the strategic initiative of a growing

business. The business plan projected an immediate increase in the number of referrals to

the outpatient therapy programs. Another projected deliverable of the project was to

enable St. Dismas to strengthen its focus on reimbursable preventive and wellness

programs for the healthier geriatric population. The project\'s longer term goal was to

increase the census in the hospital\'s inpatient units by having a location where people

could age in place until they were in need of hospitalization, and then such a facility

would be right next door.

Depending on the exact size of the apartments, their equipment, and the actual ratio of

heavy-to light-assisted units, Fred estimated that the entire project would cost between

$8,500,000 and $11,000,000 for the facility construction. That estimate included the cost

of land, furnishings, and a sheltered connection to the hospital. When up and running, it

was estimated that the net income would range between $9,000 and $12,000 per un

it per year. The team estimated the net cash flow for the entire project to be around $1,500,000

per year.

Fred requested the Board to approve the concept and allow his team to prepare a pro

forma plan to the Board for approval. The plan would include a recommended design for

both heavy-and light-assisted apartments. It would also include all costs of land,

construction, furnishings, and staffing. Income estimates would be included and would be

conservatively biased. A timetable would also be included.

The Board conducted several executive sessions, and by the middle of May voted to

approve the concept. They approved the architectural-construction-

management firm recommended by the team, and they requested Splient to proceed with developing a complete project plan. The Board appointed two Board members to sit on Fred\'s planning group.

In June, Dr. Splient gathered his executive team together and presented the project

mission, and scope. He reported that the board had approved a small budget to finance

the planning process. The Board also stipulated that construction could not begin until

after the November 1999 city elections because two of the Board Members were running

in that election, one for a city council seat and one as a county commissioner. The Board

also stated that they would like a plan that would allow the facility to open by July 2000,

as research has shown that many adult children find the summer the easiest time to assist

their parents in finding an alternative to independent living arrangements. The CEO and

executive team were now confident that they were ready to launch the project to plan,

build, and open an assisted living facility at St. Dismas.

A few days later, Fred decided that it was time to set up the team that would take

Responsibility for what he called the ALF project. He quickly decided to include the

following staff at the launch meeting:

Chief Financial Officer (CFO)

Vice President of Business Development and Marketing

Rehab Services Medical Director

Construction Project Manager for capital facilities projects

Chief Operations Officer (COO) (nursing, facilities, food services, and

housekeeping)

Director of Information Services

Director of Support Services (central supply, purchasing, and security)

Two members of the Board of Trustees, one with construction experience and the

other a probable electee to the city council.

Even though the department directors from Support Services and Information Services

would not be involved until later, Fred decided to include them from the beginning. Fred

knew some members of his team had a tendency to become obstacles to progress if they

felt left out.

Fred named the group the ALF Project Steering Committee and held the first meeting.

Fred presented his vision for the facility. He told the group that he personally would be

managing this project. He led a discussion of all the major steps that must be included in

the project plan, and asked each team member to identify the areas for which they would

accept responsibility. The hospital\'s Construction Project Manager took responsibility for

the construction of the facility, and the COO volunteered to oversee the building design,

as well as define the needs for food services, housekeeping, staffing, and policy and

procedure development. The CFO agreed to develop the budgets for each area of the

project as well as the operating budget for the facility. The CFO also agreed to create the

payroll and accounting systems necessary to operate the facility.

The IS director accepted responsibility to define and set up all the telecommunications

and information system needs of the facility. The VP of Business Development agreed to

create a preliminary marketing plan, and a communication package for the community

and hospital staff. In addition, she discussed organizing a major ground breaking event.

The Medical Director said that he would design an assessment tool for determining

residents\' level of medical needs upon moving in to the facility. He felt this was the first

step in defining what clinical services should be offered to residents. Fred told the team

that he would develop the management structure for the new facility and work with in-

house counsel to identify all governmental regulations as well as all industry standards

that pertain to an assisted living facility and govern the facility\'s practices. Splient gave

the team two months to come back with their detailed action plans for their areas of

responsibility.

St. Dismas Assisted Living Facility Project Budget Development--2 sure hecause of potential. change orders. He emphasized that the estimates assuned that the project would be conm pleted withour further changes in its design concept Fred Splient gave his ALF Project Steering Committee 2 months to develop an action planfor their area of respon-contractor about determining a more accurate cost esti sibility in the project. Each member was told to include the tasks, predecessors and successors, reeeeded, respan sible person, and an estimated cost. He asked that these be secretary had seenme measuring the land behind the presented to the steering team on August 31 While the CFO was haggling with the construction mate, he received a phone call from Dr. Zen Link, the Head of Geriaic Medicine at St. Dismas. Di. Link\'s parking lot and she wanted to know what was going on; All tough July the ALF project team scrambled o did Dr. Link. Since Dr. Link was one of the hospi to identify the steps required to open the facility and total\'s best referrers, the CFO told him about the poten determine what it would cost. Each team member met tial project. Dr. Link fet that his input was needed up with his or her departmental staff to get help in identify front as he was the only person on staff who would knovw ing what was needed. For example, the COO spoke with the health needs of the facility\'s residents and appropri the Dietary Department head and asked that she developate equipment needs and staffing models that should a plan to meet all requirements to set up the facility to feed be set up. With Dr. Link\'s inpt, the CFO estimated the residents. The COO then asked the Facilities Manager the operating costs to run the facility and projected the to develop an action plan to prepare the building andoccupancy rates needed to cover those costs. The Rehab maintain it. The COO also met with the Rehab Services Services Medical Director, who was a member of the original project team, was quite upset when he saw Dr Link\'s budget for the medical equipmentthat was to be lation, and to develop an acion plan to prepare to meet hased for the facility. The Medical Director felt that the residents\' health needs. The CO0 asked the therapyDr. Link wanted to purchase too much expensive equip manager to prepare a plan to develop social activities for ment, which was not necessary to have on site. The hospital had the majority of the equipment that was nec Medical Director and his clinical staff to identify the resi dents\' probable medical needs based on the projected popu Everyone o the team called the Chief Financial essary and there was no need to duplicate it, thus inflat Officer for help in determining the budgets for their ng that portion of the budget. The CFO did not want to get in the middle of their argument so he left Link\'s mates of cost and revenue from facility operations, and budget just as Link submitted it and hoped someone to project earnings and return on the investment. Likewould raise the issue at the next Steering Team Meeting any good administrator, when the CFO realized he The CFO was quite concerned about the lack of expe rience of the team in developing such a budget, and he felt that there was far more uncertainty in the budget action plans. The CFO also had to validate the esti had no expertise in this area, he hired a consultant to help him determine the project costs and budget. Dr Sara Sharf was chosen as the consultant-she had over than the estimates reflected 5 years\' experience in developing business plans for With the construction cost estimate and an outline of facilities. the services to be provided, the following projected cap Dr. Sharf recommended that St. Dismas target the middle income geriatric population since there were many up-scale facilities in the area. Dr. Sharf and the mar- ket researchers determined what el of rent people in that population could and would pay. They then loaked at what needed to be in the facility to meet the needs of tal expenditure was developed Preliminary Project Budget Apartment Ty 1 BR/bath units Net Unit59 450 600 r targeted population. After additional site visits of Studio units facilities and meetings with the selected construction contractor, they finalized the layout of units and common space areas that would be included the design. The Construction Project Manager requested and received an action plan and cost estimate from the construction con tractor. The contractor had estimated that construction Cmon space cost would probably run about $70 per square foor with a N o gross standard deviation of $3.67. He could not be absclutely Total gross sq ft 100 57,000 Apartment Type 0.3 22,230 96,330

Solution

Estimate the final construction budget:

The organised cost cannot be reflected in the final budget until the CFO explains when and how the expenses will be allocated back to the project\'s budget for the expenses incurred by the parent organization. The above reflects the information provided in the case.

Q.1. If the project is started on March 1st,2000 start date, the finish date is July 30th, 2001.

For November start date, the case does not mention exactly what date the project should start but rather mentions that it should start after the elections. We do not have the election date so will assume a start date of November 9,1999. Elections are usually held the first Tuesday in the month of November. The case started that one to two foe bad weather conditions during the outside construction phases of the project (30-60 working days). Days of work need to be added to the duration of each of the steps where work takes place outside if it will happen during the winter months.

Q.2. The case outlined two specific constraints that the board placed on the project:

The constraint of the building opening by July of the year following construction beginning cannot be met. No matter when the project begins it takes longer than one year to complete. If the project begins immediately after the November 1999 elections it will be completed by May 2000

Q.3. Start date of January 30th, 1999, the first 45 units would be ready May 23rd, 2000 with the entire project being completed June 27th,2000.

Q.4. I will consider the project dates stated in question 3 for this question and also consider that occupancy may begin when the first 45 units are ready, which is May 23rd, 2000. This means that the marketing plan and implementation must be completed by this date. The marketing VP states that she needs 5 months lead time for the implementation of the plan and thus, must begin 5 months prior to May 23rd, 2000.

Estimated Actual at
	Budgeted	Completion	Remaining $
Construction Costs:
Building	6,743,000	6,743,000	0
Contingency	674,300	674,300	0
Land	600,000	600,000	0
Program development $ equipment costs	405,000	405,000	0
Furniture	400,000	400,000	0
A&E Fees @ 5%	347,000	347,000	0
Financing costs	202,000	202,000	0
Capitalized interest	135,000	135,000	0
Site improvements	125,000	147,655	-22,655
Phone $ IS system	30,000	30,000	0
Kitchen equipment	30,000	23,776	6,224
Total	9,691,300	9,707,731	-16,431
Organizational Costs:
Legal and accounting	25,000	0	25,000
Initial marketing	250,000	0	250,000
Project consultant	80,000	0	80,000
Follow-up Market survey	20,000	0	20,000
Total	375,000	0	375,000
Total	10,066,300	9,707,731	358,569