TECHNICAL REPORT UCED 2007/08-02 ECONOMIC FEASIBILITY OF REBUILDING NEW FRONTIER TREATMENT CENTER IN FALLON, NEVADA
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1 TECHNICAL REPORT UCED 2007/08-02 ECONOMIC FEASIBILITY OF REBUILDING NEW FRONTIER TREATMENT CENTER IN FALLON, NEVADA UNIVERSITY OF NEVADA, RENO
2 Economic Feasibility of Rebuilding New Frontier Treatment Center in Fallon, Nevada Shannon Price and Thomas R. Harris Shannon Price is a Research Associate in the University Center for Economic Development and Department of Resource Economics at the University of Nevada, Reno. Thomas R. Harris is a Professor in the Department of Resource Economics and Director of the University Center for Economic Development at the University of Nevada, Reno. August 2007 UNIVERSITY OF NEVADA RENO The University of Nevada, Reno is an Equal Opportunity/Affirmative Action employer and does not discriminate on the basis of race, color, religion, sex, age, creed, national origin, veteran status, physical or mental disability, and in accordance with university policy, sexual orientation, in any program or activity it operates. The University of Nevada employs only United States citizens and aliens lawfully authorized to work in the United States.
3 This publication, Economic Feasibility of Rebuilding New Frontier Treatment Center was published by the University Center for Economic Development in the Department of Resource Economics at the University of Nevada, Reno. Funds for this publication were provided by New Frontier Treatment Center in Fallon, Nevada. This publication's statements, findings, conclusions, recommendations, and/or data represent solely the findings and views of the authors and do not necessarily represent the views of the U.S. Department of Commerce, the Economic Development Administration, University of Nevada, Reno, or any reference sources used or quoted by this study. Reference to research projects, programs, books, magazines, or newspaper articles does not imply an endorsement or recommendation by the authors unless otherwise stated. Correspondence regarding this document should be sent to: Thomas R. Harris, Director University Center for Economic Development University of Nevada, Reno Department of Resource Economics Mail Stop 204 Reno, Nevada Phone: 775/ UCED University of Nevada, Reno Nevada Cooperative Extension Department of Resource Economics
4 Introduction The goal of this report is to provide local decision makers with the information needed to determine whether rebuilding New Frontier Treatment Center in Fallon, Nevada is economically feasible. The analysis is based on information furnished by employees at the New Frontier Treatment Center and architects at HMC Architects. Every effort was made to depict the situation as accurately as possible. The information provided in this report is for decision-makers to use in determining the potential feasibility of rebuilding the New Frontier Treatment Center. Section II will determine the demand for the New Frontier Treatment Center. Section III calculates the projected annual costs while Section IV calculates the projected annual revenue. The economic feasibility of the New Frontier Treatment Center will be estimated in Section V. Demand Analysis Projected Admissions When the New Frontier Treatment Center was operational, its service area extended across the state of Nevada. However, the majority of patients were drawn from Churchill, Washoe, Pershing, Elko and Humboldt Counties. In this report, the demand for a rebuilt New Frontier Treatment Center is determined by using historical admissions data. The first step in calculating the projected number of admissions was to derive the 2006 admissions to population ratio for each county and service type. This ratio was then multiplied by the projected 2008 county populations, which resulted in the projected admissions by service type for 2008, as depicted in Table 1. Table 1 Projected 2008 Admissions by Service Type Service Male Female Total Detox Outpatient Residential III Residential III
5 Projected Units of Service Costs and Revenue at the New Frontier Treatment Center are calculated based on units of service (UOS). A unit of service is one day for Detox and Residential patients and a 50- minute visit for outpatients. Each service type has a different average length of stay, or number of units of service per admission. A Detox admission stays an average of 4 days, with a range of 1 to 8 days. A Residential III.1 admission stays an average of 45 days, with a range of 10 to 90 days. A Residential III.5 admission ranges from 30 to 45 days with an average stay of 30 days. Adult Outpatient admissions include an average of 75 visits, with a range of 10 to 100 visits. Finally Adolescent Outpatient admissions range from 5 to 50 visits with an average of 30 visits. Table 2 depicts the projected average annual units of service for 2008 at New Frontier Treatment Center using the average length of stay for each service type. The range shows the minimum and maximum annual units of service. Table 2 Projected Annual Units of Service 2008 Service Average Units of Service Range Detox 254 ( ) Outpatient 23,017 (3, ,782) Residential III.1 1,529 ( ,059) Residential III.5 5,036 (5,036 7,554) Costs Operating Costs Operating costs for New Frontier Treatment Center include items such as payroll, supplies, marketing expense, insurance, licenses and fees, repairs and maintenance, training, and equipment rental. Based on historical data, the New Frontier Treatment Center provided a projected cost per unit of service for each service type. The cost per unit of service for each service type is as follows: 2
6 Detox $ Residential III.1 $ Residential III.5 $ Outpatient $36.00 The 2008 projected operating costs, as shown in Table 3, were calculated by multiplying the cost per unit of service by the average annual units of service for each service type. The total projected operating costs for 2008 are $1.8 million, with a range of $0.61 million to $2.3 million. Table 3 Projected Operating Cost by Service Type 2008 Service Average Cost Range Detox $45,974 ($11, $91,767) Outpatient $828,612 ($110, $1,108,152) Residential III.1 $220,176 ($48, $440,496) Residential III.5 $725,184 ($725, $1,087,776) Total Operating Costs $1,819,946 ($896, $2,728,191) Capital Costs Capital costs include construction costs and fees and cost of equipment and furniture. The cost of land is not included in this analysis. Construction costs to rebuild the New Frontier Treatment Center were provided by HMC Architects. The architects have designed a 13,446 square foot space. The cost per square foot is approximately $295. In addition to construction costs there are architectural and engineering fees, which run approximately 16.5% of construction costs. Additionally, the cost of equipment and furniture must be included. According to the architects, these costs are typically about 30% of construction costs. Capital costs are shown in Table 4. The total projected capital costs are $5.2 million. Capital costs are annualized using straight line depreciation. The costs of furnishings are depreciated over 10 years while the rest of the 3
7 capital costs are depreciated over 30 years. The annual projected capital costs are $204,250. Table 4 Projected Capital Costs Projected Cost Construction Costs $3,966,570 Furnishings $485,487 Architectural & Engineering Fees $654,484 Permit Fees $50,000 Total Capital Costs $5,156,541 Annualized Capital Costs $204,250 Total Projected Costs 2008 Total projected annual costs are calculated by combining the annual operating costs with the annualized capital costs. Table 5 depicts the projected annual costs for The projected annual costs for the New Frontier Treatment Center are $2.02 million. Table 5 -- Total Projected Annual Costs Average Estimate Annual Operating Costs $1,819,946 Annual Capital Costs $204,250 Total Annual Costs 2,024,196 Revenue Service fees at the New Frontier Treatment Center are collected on a sliding scale. Based on income level and family size, patients are asked to pay the full fee, 75% of the full fee, 40% of the full fee, or 15% of the full fee. Similar to operating costs, fees are based on units of service. Each service type has the following fees: 4
8 Detox $ Residential III.1 $ Residential III.5 $ Outpatient Group $40.00 Oupatient Individual $75.00 Evaluation $ Since it is not possible to determine in advance what percentage of patients will pay each fee, this report examines five revenue scenarios. Scenario 1 is the most optimistic; as it assumes that all patients will pay the full fee. Scenario 2 assumes that all patients will pay 75% of the full fee. Scenario 3 assumes that all patients will pay 40% of the full fee. Scenario 4 is the most conservative; as it assumes that all patients will pay 15% of the full fee. Finally, Scenario 5 uses actual collection rates from January through March at the New Frontier Treatment Center to determine the average percentage of patients paying each rate. Based on these rates, the majority of patients receiving Residential Treatment pay only 15% of the fee, while the majority of individuals receiving Outpatient Treatment pay 75% of the fee. Tables 6-10 depict the five revenue scenarios. The maximum projected revenue is $2.84 million. The minimum projected revenue is $458,414. Table Projected Revenue for Scenario 1 100% Fee Payment Average Revenue ($) Range ($) Detox $114,300 ($28, $228,150) Outpatient* $1,189,212 ($159, $1,590,403) Residential 3.1 $344,025 ($76, $688,275) Residential 3.5 $1,133,100 ($1,133, $1,699,650) Evaluation $57,700 - Total Revenue $2,838,337 ($1,454, $4,264,178) *Outpatient revenue assumes that one-third of visits are individual. 5
9 Table Projected Revenue for Scenario 2 75% Fee Payment Average Revenue ($) Range ($) Detox $85,725 ($21, $171,112) Outpatient* $891,909 ($119, $1,192,803) Residential 3.1 $258,019 ($57, $516,206) Residential 3.5 $849,825 ($849, $1,274,738) Evaluation $57,700 - Total Revenue $2,143,178 ($1,105, $3,212,559) *Outpatient revenue assumes that one-third of visits are individual. Table Projected Revenue for Scenario 3 40% Fee Payment Average Revenue ($) Range ($) Detox $45,720 ($11, $91,260) Outpatient* $475,685 ($63, $636,161) Residential 3.1 $137,610 ($30, $275,310) Residential 3.5 $453,240 ($453, $679,860) Evaluation $57,700 - Total Revenue $1,169,955 ($616, $1,740,291) *Outpatient revenue assumes that one-third of visits are individual. Table Projected Revenue for Scenario 4 15% Fee Payment Average Revenue ($) Range ($) Detox $17,145 ($4, $34,223) Outpatient* $178,382 ($23, $238,561) Residential 3.1 $51,604 ($11, $103,241) Residential 3.5 $169,965 ($169, $254,948) Evaluation $57,700 - Total Revenue $458,414 ($261, $634,803) *Outpatient revenue assumes that one-third of visits are individual. 6
10 Table Projected Revenue for Scenario 5 Current Collection Rate Average Revenue ($) Range ($) Detox $28,792 ($7, $57,471) Outpatient* $787,853 ($105, $1,053,642) Residential 3.1 $86,660 ($19, $173,376) Residential 3.5 $285,428 ($285, $428,142) Evaluation $57,700 - Total Revenue $1,246,433 (474, $1,770,332) *Outpatient revenue assumes that one-third of visits are individual. Projected Net Returns Net returns is defined as revenue minus costs and is calculated for each of the five scenarios. These estimates are presented in Tables 11. Scenarios 3-5 show annual losses for the treatment center. Scenarios 1 and 2 show that if collection rates for patients are at least 75% of the full fee, the treatment center will have positive net returns. Table Projected Net Returns Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 Total Annual Revenue $2,838,337 $2,143,178 $1,169,955 $458,414 $1,246,433 Total Annual Costs 2,024,196 2,024,196 2,024,196 2,024,196 2,024,196 Revenue Minus Costs $814,141 $118,982 -$854,241 -$1,565,782 -$777,763 This report is intended to provide information that will assist in the decision to rebuild the New Frontier Treatment Center. This report relies heavily on recent admission and cost data provided by the New Frontier Treatment Center. Based on the current analysis, if the future collection rates remain similar to recent rates as shown in Scenario 5, the New Frontier Treatment Center will likely incur annual losses. However, if collection rates improve significantly, New Frontier Treatment Center could potentially turn a profit. Additionally, losses may be negated by grants or subsidies from local, state or federal government entities. 7
11 References Hardcastle, Jeff Age Sex Race and Hispanic Origin Estimates from 2000 to 2005 and Projections from 2006 to 2026 for Nevada and Its Counties. Reno NV: Nevada State Demographer s Office. McArthur, Karl A., Thomas R. MacDiarmid and Thomas R. Harris. March Feasibility of the Proposed New Frontier Treatment Center Expansion in Fallon, Nevada. UCED Technical Report: UCED
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