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The idea has been welcomed in the community amid concerns about Central Otago's ageing population.
Talks have continued between the Maniototo Health Services Ltd board and Heritage NZ and board general manager Geoff Foster said they were still working through options and "nothing is finalised".
Parts of the exterior of the old Maniototo Hospital building had a Heritage New Zealand category 2 classification.
The MHSL board has stated its preference for the 90-year old building to be demolished and Mr Foster confirmed the supported living unit concept would be following demolition of the building.
Maniototo Community Board chair Robert Hazlett said any development which benefited the community "can only be a good thing".
Mr Hazlett said there were pensioner units in the Maniototo which were designed for residents who can "look after themselves with minimal care".
"It is the ones that need the care that need the help."
At a Teviot Community Board meeting earlier this month, board member John Pritchard raised concerns the population was ageing faster than expected and the birth rate was falling.
The issue had been a talking point at the community board conference in New Plymouth, Mr Pritchard said.
"New Zealand is going to face some significant problems in the future which aren't going to get any better. We're coming to the crunch time very shortly."
Retired Central Otago district councillor Daphne Hull, of Alexandra, said there had been a shortage of retirement-type accommodation in the region "for quite some time".
"Alexandra has been dragging the chain a little bit. I think there is a section where we are really lacking."
Facilities for the elderly in Alexandra included Castlewood Nursing Home and Ranui Court.
About $22,000 was raised for a five-bedroom extension and covered accessway for the Teviot Valley Rest Home earlier this year when Central Otago Mayor Tim Cadogan engaged in a debate with his brother and Clutha Mayor, Bryan Cadogan.
Elsewhere, other ideas such as using the old hospital building to house the Eden Hore fashion collection or turning it into a tourist hotel had previously been floated by members of the public.
Mr Foster said he was hopeful a resolution would be met with Heritage NZ support as local residents were keen to see the building knocked down.
"We would like to think that it is a simple process," he said.
"The feedback we're getting from the community is that they would like to see it [the building] go."