The Demise of the Overhead Myth: Administrative Capacity and Financial Sustainability in Nonprofit Nursing Homes

Abstract

AbstractIn 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.