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

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.

Nonprofit capacity and social performance: mapping the field and future directions

“…They might need more financial and human capacity in delivering their service and achieving their social mission. Different social missions might require different types of capacity (Park and Matkin 2021 ). Furthermore, there exists a growing demand to look into religious-based nonprofits (Fu et al 2021 ).…”

“…From 2006 to 2011, articles discussed capacity building, leadership development, and community capacity. Since then, studies on financial capacity (Clausen 2021 ; Park and Matki 2021 ) have been growing.…”

“…In addition to the nonprofits’ characteristics, external factors such as the location and the situation are also crucial issues. Nonprofits located in rural areas may require a different capacity to achieve social missions (Park and Matkin 2021 ). Moreover, cross-country differences exist between capacity and social performance, such as in developing or authoritative countries (AbouAssi et al 2019 ; Casey 2016 ; Fu and Shumate 2020 ).…”

Softening Performance's Pitfalls by Integrating Context and Capacity: A Government Competitiveness Framework

“…Thomson and Perry (2006) and Agranoff and McGuire (2001) underscore capacity's role in collaborative or networked performance arrangements. Hou and Moynihan (2008) and Park and Matkin (2021) connect capacity to fiscal performance and sustainability. Christensen and Laegreid (2020), Christensen, Laegreid, and Rykkja (2016), and Cavalcante and Pereira (2019) all link capacity to the performance of various public policies.…”

Dollars and Sense: Tax, Spend, and Satisfice

“…The authors find that the regulator's threat to “name and shame” nonpaying entities was effective at incentivizing regulatory participation and generating income. In a study of the financial sustainability of nonprofit nursing homes, Park and Matkin (2021) 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. Their findings suggest a “sweet spot” in the level of administrative support that promotes organizational sustainability where administrative costs are about 40 percent of total organizational costs.…”