The Demise of the Overhead Myth: Administrative Capacity and Financial Sustainability in Nonprofit Nursing Homes
Young Joo Park, David S. T. Matkin
Abstract
Abstract In the study and practice of public administration , it is often assumed that higher levels of budgetary support for non‐program expenses , such as administrator salaries , accounting , grant writing , and marketing , are evidence of inefficiency and wasteful spending. As such , grant makers and researchers often use the ratio of organizations ’ administrative to total costs to measure the efficiency of public services. While this perspective has some validity , it also significantly minimizes the effect of administrative functions on sustainability , an important aspect of long‐term performance in public service organizations. We use standardized cost data from a 14‐year panel of approximately 3,000 nonprofit nursing homes and find an inverted U‐shaped relationship between administrative cost ratios and financial sustainability , which suggests a “sweet spot” in the level of administrative support that tends to promote organizational sustainability. This sweet spot occurs when administrative costs are about 40 percent of total organizational costs.