Soft budget constraints in Polish public healthcare entities

Abstract

Although the theory of soft budget constraints is widely presented in the literature, little is known about the factors of soft budget constraints in public hospitals in Poland. This study is relevant because many Polish hospitals struggle with serious debt problems. The study aims to systematise the regulatory and legal provision of soft budget restrictions in the activities of healthcare institutions, particularly public hospitals in Poland, and to assess the impact of these restrictions on their further functioning. An analysis of hospitals’ regulatory and legal activities shows the implementation of various soft budget restrictions. On November 20, 2019, Poland returned to the soft budget constraints, which functioned immediately after the introduction of reforms in the late 90s of the last century. As of 2021, out-of-pocket costs for treatment have decreased to 19.56%, but costs are gradually increasing and in 2020, according to the World Bank, they amounted to 71.89%. The provision of medical services mainly by public hospitals owned by local governments and scattered healthcare debt make it difficult to liquidate an inefficient public hospital in the event of its default. The study proves that the main reason for not eliminating the soft budgetary constraints of hospitals through their commercialization was the inconsistency of the carried out reform of commercialization of hospitals with the financial condition of local authorities.

Full text

“Soft budget constraints in Polish public healthcare entities”
AUTH ORS
Zbysław Dobrowolski
Waldemar Sługocki
Marian Kachniarz
Arkadiusz Babczuk
ARTICLE INFO
Zbysław Dobrowolski, Waldemar Sługocki, Marian Kachniarz and Arkadiusz
Babczuk (2023). Soft budget constraints in Polish public healthcare entities.
Public and Municipal Finance, 12(1), 22-32. doi:10.21511/pmf.12(1).2023.03
DOI http://dx.doi.org/10.21511/pmf.12(1).2023.03
RELEASED ON Thursday, 22 June 2023
RECE IVED ON Saturday, 25 March 2023
ACCEPTED ON Wednesday, 24 May 2023
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JOURNAL "Public and Municipal Finance"
ISSN PRINT 2222-1867
ISSN ONLINE 2222-1875
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NUMBER OF REFERENCES
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© The author(s) 2023. This publication is an open access article.
businessperspectives.org

22
Public and Municipal Finance, Volume 12, Issue 1, 2023
http://dx.doi.org/10.21511/pmf.12(1).2023.03
Abstract
Although the theory of so budget constraints is widely presented in the literature,
little is known about the factors of so budget constraints in public hospitals in Poland.
is study is relevant because many Polish hospitals struggle with serious debt prob-
lems. e study aims to systematise the regulatory and legal provision of so budget
restrictions in the activities of healthcare institutions, particularly public hospitals in
Poland, and to assess the impact of these restrictions on their further functioning. An
analysis of hospitals’ regulatory and legal activities shows the implementation of vari-
ous so budget restrictions. On November 20, 2019, Poland returned to the so budget
constraints, which functioned immediately aer the introduction of reforms in the late
90s of the last century. As of 2021, out-of-pocket costs for treatment have decreased to
19.56%, but costs are gradually increasing and in 2020, according to the World Bank,
they amounted to 71.89%. e provision of medical services mainly by public hospitals
owned by local governments and scattered healthcare debt make it dicult to liquidate
an inecient public hospital in the event of its default. e study proves that the main
reason for not eliminating the so budgetary constraints of hospitals through their
commercialization was the inconsistency of the carried out reform of commercializa-
tion of hospitals with the nancial condition of local authorities.
Zbysław Dobrowolski (Poland), Waldemar Sługocki (Poland),
Marian Kachniarz (Poland), Arkadiusz Babczuk (Poland)
Soft budget constraints
in Polish public healthcare
entities
Received on: 25 of March, 2023
Accepted on: 24 of May, 2023
Published on: 22 of June, 2023
INTRODUCTION
A so budget constraint aects economic rationality by reinforcing a
party’s expectation that one party to a commercial or social contract
will intentionally, directly or indirectly, remedy the other’s nancial de-
ciencies (e.g., decits or debt). Although so budget constraints were
initially perceived through the prism of socialistic economies, they are
oen found in public sector institutions that are generally not prot-ori-
ented, also in countries with liberal market economies and developed
ones (Kornai, 1986; Kornai et al., 2003; Wu & Lin, 2022; Bai & Wang,
2022; Litovtseva et al., 2022; Arespa & González-Alegre, 2023).
In 1989, the reform of the Polish healthcare system began. In particu-
lar, during 1995–2009, medical expenses in the country increased ve
times (from PLN 18.5 billion to PLN 99 billion), and the share of GDP
on healthcare increased from 5.5% in 1995 to 7.4% in 2009. Although
Polish healthcare spending has signicantly improved in recent years,
current healthcare expenditure per capita, PPP (current internation-
al USD), was lower than other developed countries from OECD. In
the case of Poland, it was USD 2,528.51. Whereas, for example, Great
Britain USD 6,133.60, Denmark USD 7,139.64 and the United States
USD 11,702.41 (World Bank, 2023). e nancial support of the Polish
healthcare system is provided by the funds of the National Medical
© Zbysław Dobrowolski, Waldemar
Sługocki, Marian Kachniarz, Arkadiusz
Babczuk, 2023
Zbysław Dobrowolski, Dr. hab.,
Prof. UJ, IEEF, Institute of Public
Aairs, Jagiellonian University,
Poland; Institute of Economic and
Financial Expertise, Łódź, Poland.
(Corresponding author)
Waldemar Sługocki, Dr. hab., Prof. UZ,
Institute of Economics and Finance,
University of Zielona Góra, Poland.
Marian Kachniarz, Dr. hab., Prof.
UPWR, Wroclaw University of
Environmental and Life Sciences,
Poland.
Arkadiusz Babczuk, Dr., Institute of
Economic and Financial Expertise,
Łódź, Poland.
is is an Open Access article,
distributed under the terms of the
Creative Commons Attribution 4.0
International license, which permits
unrestricted re-use, distribution, and
reproduction in any medium, provided
the original work is properly cited.
www.businessperspectives.org
LLC “P “Business Perspectives”
Hryhorii Skovoroda lane, 10,
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BUSINESS PERSPECTIVES
JEL Classification H51, H60, H75
Keywords so budget constraints, healthcare system, public
hospitals, debt, commercialization
Conict of interest statement:
Author(s) reported no conict of interest

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Insurance Fund, which is 1/3 formed from citizens’ contributions and 2/3 from state funds. Most of the
country’s citizens (98%) have mandatory health insurance, which guarantees medical care.
Starting in October 2017, a system of providing basic hospital services was introduced in Poland, popu-
larly called the “hospital network.” e general goals of the reform included improving the organization,
structure, and access to services provided by hospitals and facilitating hospital management (Dubas-
Jakbczyka et al., 2019).
Although so budget constraints are well-recognized, their existence in public healthcare entities re-
quires further research because the rapid growth of public expenditures on the healthcare system did
not reduce the nancial problems of Polish public healthcare entities.
1. LITERATURE REVIEW
e term “so budget constraints” was rst used
by Kornai (1979) to denote the specic relationship
between enterprises and state authorities in a cen-
trally planned economy. Kornai (1979) argued that
the nature of budget constraints determines the
behavioral response of decision-makers. Following
this approach, it can be assumed that in the case
of the private sector, managers adjust the costs of
the managed enterprise according to the nancial
returns they expect from the sale of products or any
other interest in the assets held (Kornai, 1979, 1986;
Putterman, 1993; Kornai et al., 2003).
A relaxation of the budget constraint occurs
when the strict relationship between expendi-
tures and revenues is reduced because anoth-
er organization, usually the government, pays
for the excess of expenditures over revenues
(Dudzevičiūtė, 2023; Bublyk et al., 2023). us,
the budget constraint ceases to constrain deci-
sion-makers behavior (Kornai, 1986). Selective
aid to the enterprise will not lead to a so
budget constraint. Only permanent or eective
assistance to unprotable enterprises can pro-
vide hope for the continuation of such practices
(Kornai, 1979).
Extensive literature in government and econom-
ics explains the cause of so budget constraints
through external factors such as the state and
its political system (Kornai, 1979; Bardhan &
Roemer, 1993; Putterman, 1993). e nature of
the socialist state catalyzes wrong nancial pro-
jects to avoid the risk of high unemployment (Bai
& Wang, 2022). e main prerequisite for de-
veloping so budget restrictions is the paternal-
istic attitude of the state toward the enterprises
(Kornai, 1979). e dierent perceptiveness of so
budget constraints was proposed by Dewatripont
and Maskin (1995), introducing a model to en-
dogenise so budget constraints. Managers oer
ex-ante inecient projects as long as they are ef-
cient ex-post. erefore, a centralised system
starts many inecient projects that should not
have started (Bai & Wang, 2022). It may lead to
waste and abuse (Dobrowolski, 2001; Babczuk,
2008). erefore, so budget constraints t the
contract’s opportunism identied by Williamson
(1993).
Although so budget constraints initially con-
cerned centrally-planned economies, especially
those under reform, the phenomenon may occur
in dierent economic and social environments,
including local governments (Mitchell, 2000;
Duggan, 2000; Moesen & van Cauwenberge, 2000;
Tsaurai, 2023; Petruk et al., 2022). is is espe-
cially true for healthcare (Kireyeva et al., 2022;
Sarihasan et al., 2022; A ldasem et al., 2022; Sharma
& Kumar, 2023; Joshipura & Lamba, 2023).
One may nd an explanation of so budget con-
straints in public healthcare entities’ activities
through an analysis of Segal’s (1998) work. Based
on the assumptions, the healthcare monopoly of
many public hospitals gives them an advantage
in their relationship with the state: their bank-
ruptcy would interrupt the whole healthcare sys-
tem too much. Hence, the state prefers to sub-
sidize their activities than closing them down.
More than half of the Polish healthcare entities
are owned by districts, and many have nancial
problems (Kachniarz, 2008). erefore, Bolton
and Scharfstein’s (1996) ndings are valid. e

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dispersed nancial issues make it challenging to
avoid liquidating an inecient healthcare system
when its default occurs.
Concerning healthcare institutions, which are un-
der the management of local authorities, the prob-
lem of so budget restrictions can arise in dierent
planes. It can appear in the relationship between
the subject of healthcare and the local self-gov-
ernment body as the establishing and controlling
body. In such a situation, the decision of the man-
agers of the healthcare institution is inuenced by
their belief that the local government will support
them nancially. However, attempting to transfer
the debt burden from the public healthcare insti-
tution to its founder may lead to nancial dicul-
ties for the local government. So local government
and healthcare managers can expect help from the
state government. is approach can be a cascade
of support for nancial failure.
It should be noted that for so budget constraints to
cause a recurrent and general threat of bankruptcy
of public healthcare facilities managed by local gov-
ernments, the belief in the inevitability of nancial
assistance from the state’s founder must be shared
by the public heads of healthcare institutions. e
same applies to local authorities (Babczuk, 2008).
e evaluation of the local authority’s and central
government’s propensity to oer support to the
public hospitals, as well as the assessment of the
central government’s tendency to provide sup-
port to the local authority, is based on the analy-
sis and evaluation of:
1) the existing legislation dening the role of the
supporting entity in the situation of the sup-
ported entity’s insolvency;
2) previous experiences supporting hospitals
by local authorities or central government in
crises.
Legislation dening the relationship between the
hospital, the parent institution, and the central
government, and between the local government
and the central government, may:
1) impose obligations to rescue hospitals that are
at risk of bankruptcy;
2) impose a ban on admissions to hospitals at
risk of insolvency; or
3) contain no precise regulation (Babczuk, 2008).
e propensity to transfer public money to indi-
vidual recipients depends mainly on the nature
of a country’s political and budgetary structures
(Alesina & Perotti, 1994). e nature of the budg-
etary constraints of public hospitals and local au-
thorities is determined by their experience of the
support the central government oers (Babczuk,
2008).
Although the previous studies analyzed so
budget constraints in Polish public organisations
(Babczuk, 2008; Kachniarz, 2008), they did not
comprehensively examine the direction and dy-
namics of so budget constraint occurrence in
Polish public hospitals and other public healthcare
entities. is study lls out this gap and analyses
whether adopted laws inuence the so budget
constraint occurrence in public healthcare enti-
ties. e study aims to resolve the following re-
search question:
RQ1: Do the Polish laws strengthen the existence
of so budget constraints in public health-
care entities?
Laont and Tirole (1993), Schmidt (1996), and
Schmidt and Schnitzer (1993) perceive privatiza-
tion as a commitment mechanism in a nancial
eciency problem. One may argue that the com-
mercialization of hospitals – transforming their le-
gal form to municipal, commercial law companies
– is a clear and universal form of doing business
that allows for the preservation of public owner-
ship of entities. It links ex-post unprotable health
activities with ex-ante eciency.
Although Babczuk and Kachniarz (2012) and
Przybyła et al. (2014) showed the scale of the com-
mercialization of Polish hospitals, they did not com-
prehensively explain why the commercialization of
Polish hospitals was limited. erefore, based on all
of the above, determining the direction and dynam-
ics of the emergence of so budget constraints in
Polish public hospitals and other healthcare institu-
tions and the nancial eectiveness of the commer-
cialization program remains an urgent issue.

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Based on the literature review, it is necessary to
systematise the regulatory and legal provision of
so budget restrictions in the activities of health-
care institutions, including public hospitals in
Poland, and to assess the impact of these restric-
tions on their further functioning.
2. METHODS
e methodological basis is a set of methods and
techniques of scientic knowledge. e study us-
es databases (Google Scholar, Scopus, and Web of
Science) to choose and analyze the literature to re-
solve the research questions. Besides, a signicant
part of this analysis includes the analysis of Polish
laws and regulations available on the webpage of
the Polish Parliament.
A systematic approach was used as a general scien-
tic method, which allowed for analyzing the jus-
tications for bills publicly available on the web-
page of the Polish Parliament from 1997 to 2022.
Finally, this study uses data gathered from audit
reports published by the Polish supreme audit in-
stitution and public organization responsible for
oversight of local government in Poland.
e study also used analysis, synthesis, and gen-
eralization to determine the theoretical aspects
of the direction and dynamics of so budget con-
straints in Polish public hospitals and other public
healthcare entities.
3. RESULTS AND DISCUSSION
3.1. Responsibility for the debt
of hospitals in the light of the law
e analysis of the provisions of the law, jus-
tications for changes to the law published by
the Polish Parliament and the judgment of the
Constitutional Tribunal (Kancelaria Sejmu, 1997,
2005, 2007, 2009, 2016, 2016a, 2017, 2019, 2021,
2022) showed the following.
e Law Amending the Healthcare Entities Act
and some other Acts of June 20, 1997 (Journal
of Laws No. 104, item 661) created a legal and or-
ganizational framework for public hospital oper-
ations in Poland. Although this law introduced
the concept of a public healthcare entity, its legal
form was imprecise, making it the subject of con-
sideration in courts of various instances (includ-
ing the Supreme Administrative Court and the
Constitutional Tribunal) and being amended 53
times during 1991–2009. Until June 30, 2011, the
Healthcare Entities Act of August 30, 1991 (Journal
of Laws from 2007 No. 14, item 89 as subsequently
amended) primarily regulated the nancial activ-
ity of public healthcare entities (Articles 35(b) and
(c) and Articles 50, 60 and 61). According to Article
35(b), a public healthcare entity, including a public
hospital, independently covers costs related to its
activities and obligations. Article 60(1) provided
that a public hospital covered any of its liabilities.
However, Article 61 of the Healthcare Entities Act
of August 30, 1991, did not specify an institution
for auditing the annual nancial reports of public
hospitals. It resulted in a lack of consequences for
disapproving the yearly nancial information pro-
vided. is loophole limited the owner’s ability to
oversee public hospitals.
Article 60(2) of the Healthcare Entities Act of
August 30, 1991, excluded the nancial responsi-
bility of public hospitals. A public hospital with
bad economic conditions could not be liquidated if
other entities could not realize the hospital’s tasks
in a manner securing the uninterrupted provision
of healthcare services to the public. In such a sit-
uation, the hospital’s founding body was obliged
to nance the public hospital’s liabilities (Article
60(4) of the Healthcare Entities Act of August 30,
1991). Besides, any liabilities and receivables of
the public hospital before its liquidation had to
be transferred to its founding body (Article 60(6)
of the Healthcare Entities Act of August 30, 1991).
is provision guaranteed that the public hospi-
tals’ nancial results did not aect the other hos-
pitals’ activities.
e Healthcare Entities Act of August 30, 1991,
did not make a public hospital manager respon-
sible for the hospital having a negative nancial
result. ey were also absent from the Public
Finance Act of June 30, 2005 (Journal of Laws No.
249 of 2005, item 2104 as subsequently amended)
and the Public Finance Act of August 27, 2009
(Journal of Laws from 2022, item 1634). It is on-
ly Article 16(2) of the Act on Violations of Public

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Finance Management Regime of December 17,
2004 (Journal of Laws from 2021, item 289) ena-
bles charging a public hospital’s manager with lia-
bility for the manager’s negligence or non-perfor-
mance of duties which resulted in the public hos-
pital’s dire economic conditions.
Since July 1, 2011, the provisions of the Medical
Service Law of April 15, 2011 (Journal of Laws
from 2022, item 633) have regulated the opera-
tions of healthcare providers. Article 7 of this Law
states that the Treasury (represented by the min-
ister, a central governmental agency, or a province
head), local authorities, and medical universities
may continue operating public hospitals. Since
July 1, 2011, the provisions of Articles 51-82 of the
Medical Service Law of April 15, 2011, have reg-
ulated the nancials of public hospitals and set
forth the rules for their legal and organizational
transformations. Article 52 of the Medical Service
Law provides that a public hospital shall use its re-
sources and proceeds to cover the expenditure re-
lated to its operations and liabilities. Article 59(1)
of the Law mentioned above also obliges public
hospitals to cover any negative nancial result of
their operations.
Additionally, sections (2) and (4) of Article 59 of
the Law mentioned above enabled the organi-
zational transformation of public hospitals with
debts. It means that when a public hospital shows
a net loss on operations in its annual nancial
statement for any scal year, the amount of such
loss, as increased by the assets impairment loss
for the same year, may be covered by the founding
body. However, the loss coverage must occur with-
in three months aer the nancial statement is au-
dited and approved. If the loss is not covered, the
founding body shall have 12 months to commence
the procedure of either a legal and organization-
al transformation or a liquidation of a public hos-
pital. Article 60(6) of the Law mentioned above
states that the assets, liabilities, and receivables
achieved by a public hospital before its liquidation
shall become its founding body’s assets, liabilities,
and receivables. When a decision has been taken
to transform a public hospital into a commercial
company, before executing a transformation deed,
the founding body calculates a debt ratio of such
a public hospital. Article 70 of the Law mentioned
above provides that the debt ratio shall be calcu-
lated as the proportion of long- and short-term li-
abilities, less short-term investments, to the total
income, such as public hospital achieves. Where
the debt ratio thus calculated exceeds 50%, the
founding body shall have to take over the liabili-
ties of the public hospital involved in the amount,
ensuring that on the day of the transformation of
this public hospital into a commercial company,
the debt ratio of the such newly formed company
does not exceed 50%. Where the debt ratio thus
calculated is at most 50%, the founding body may
take over the liabilities of the public hospital at its
discretion. What does it mean? e law states that
newly established medical service delivery can be
signicantly indebted from day one. Article 80(4)
of the Medical Service Law states that the rights
and obligations of the previously existing public
hospital are moved into a newly established com-
mercial company.
In 2016, changes were introduced to the Act on
Medical Activity (Act of June 10, 2016, amending
the Act on medicinal activity and certain other acts
(Journal of Laws, item 960). eir main goal was
to stop the commercialization of hospitals, leaving
the founding body obligated to cover the debt. e
provisions resulted from fears that the public sec-
tor may lose ownership of healthcare entities. It was
written in the justication for the Act, “It is neces-
sary to maintain the inuence of the state on the
functioning of healthcare entities so that everyone
can be guaranteed the constitutional right to health
protection” (Kancelaria Sejmu, 2016).
e next idea was linked with the so-called hospi-
tal network. e system of basic hospital security
for healthcare services was introduced on October
1, 2017, by the Act of March 23, 2017, amending
the Act on healthcare entities nanced from pub-
lic funds (Journal of Laws, item 844). However, the
criteria of these systemic changes did not consider
the units’ potential. It did not introduce signicant
changes in the internal organization and the allo-
cation of resources to optimise the treatment struc-
ture. As a result, the few private institutions that fo-
cused on selected specialist procedures were closed.
e last legal accent in shaping the health care sys-
tem in Poland was the judgment of November 20,
2019, of the Constitutional Tribunal, which ruled
that Art. 59 sec. 2, the Act on medical activity, is

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inconsistent with the Constitution of the Republic
of Poland (Kancelaria Sejmu, 2019). It means that
no clear rules limit hospitals’ indebtedness. So
Poland has returned to so budget constraints,
which functioned just aer the implementation of
reforms in the late 90s last century.
3.2. The hospitals’ liabilities and
commercialization program
In 1994 and 1995, public hospitals and other
healthcare entities received PLN 2 billion from the
central budget to cover the due liabilities. Next, in
1997, the State Treasury nanced the liabilities due
from healthcare entities and paid PLN 1.7 billion.
In 1998, the state paid PLN 8 billion and reduced
liabilities due to public hospitals (Młodzianowska,
2006). e state’s nancial support to public
healthcare entities during 1991–1998 amount-
ed to PLN 11.7 billion (Najwyższa Izba Kontroli,
1999). At the end of 2022, there were 585 public
hospitals in Poland, including 125 capital compa-
nies (with 100% public capital). Most public hos-
pitals were run by districts (255, i.e., 44% of the
total) and voivodeship self-governments (175, i.e.,
31%). Hospitals run by cities with district rights
accounted for 8% (46 hospitals), and communal
hospitals for only 2% (13 units). Ninety-four hos-
pitals (16%) have been transformed into commer-
cial companies. In the fourth quarter of 2003, the
liabilities of public healthcare entities totaled PLN
7.5 billion. In the fourth quarter of 2003, the li-
abilities of public healthcare entities totaled PLN
7.5 billion. In the following years, it steadily in-
creased and amounted to PLN 18.9 billion in 2020,
while due liabilities amounted to PLN 2.1 billion.
One of the most signicant shares in generating
and due liabilities had public hospitals established
and supervised by districts (35% of total liabilities.
e hospitals that belonged to regional local gov-
ernments generated the same scale of liabilities
(Ministerstwo Zdrowia, 2021, 2023).
Figure 1 shows that despite the slight increase in
healthcare expenditures, out-of-pocket costs for
treatment began to decrease signicantly starting
in 2018. e corresponding increase in domes-
tic general government health expenditure ex-
plains this trend. Because since then, Poland has
switched to the Beveridge system, which, unlike
social health insurance (SHI), is nanced from
state revenues.
According to Art. 170 sec. 1 and 2 of the Public
Finance Act of 2005, the total amount of debt of the
district and other local government units at the end
of the budget year may not exceed 60% of the rev-
enue of this unit in a given budget year, and dur-
Figure 1. Health expenditures in Poland during 2011–2021
Source: The World Bank (2023a, 2023b, 2023c).
6.24% 6.22% 6.41% 6.39% 6.39% 6.53% 6.56% 6.33% 6.45% 6.49% 6.59%
23.96% 24.27% 23.80% 23.01% 23.31% 23.08% 23.06% 20.79% 20.44% 20.03% 19.56%
71.03% 69.83% 70.30% 69.94% 69.33% 68.81% 68.82% 71.09% 71.38% 71.89%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Current health expenditure (% of GDP)
Out-of-pocket expenditure (% of current health expenditure)
Domestic general government health expenditure (% of current health expenditure)

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ing the budget year – 60% of the planned revenue at
the end each quarter. In the following years, the so-
called individual district debt ratio was implement-
ed due to the amendment to the Public Finance Act
(Article 243 of the 2009 Public Finance Act). is
indicator further limited the possibility of self-gov-
ernment organisations getting into debt.
e total income of local government units in 2021
amounted to PLN 333.4 billion. Still, the income
of districts was only PLN 36.1 billion, while over a
third of all public hospitals belong to districts. e
total due liabilities of local government units in
2021 amounted to PLN 57.3 billion. Districts’ due
liabilities at the end of 2021 amounted to PLN 2.1
billion (KRRIO, 2022).
One of the planned preventive measures against
excessive indebtedness of public healthcare enti-
ties was their commercialization and, thus, the
transformation of their legal and organizational
form. It means that public hospitals nanced by
local governments were to be transformed into
commercial law companies owned by local gov-
ernments. Despite implementing this commer-
cialization program, the scope of transformation
turned out to be small. e pool of funds allocated
for this purpose in the state budget was not used.
As the Supreme Audit Oce of Poland assessed in
its report, in 2011–2014, local government units
obtained subsidies according to the April 15, 2011
Act on medical activity, transforming only 45 pub-
lic healthcare entities out of the planned 500. In
the same period, only 23 were used, and 8% of
the budget reserve was allocated for this purpose
(Najwyższa Izba Kontroli, 2015).
e analysis of the legal provisions showed that
loopholes in the existing legal system catalyzed so
budget constraints in hospitals. e study shows that
the Polish regulations dened a hospital’s founding
body’s role as primarily taking over the debt of pub-
lic hospitals. However, a founding body could not
review and enforce ecient public hospital man-
agement eectively. At the same time, the founding
body remained fully liable for the nancial result of
such control. It was a signicant obstacle to ensuring
the proper operation of public hospitals. e signi-
cant obstacle also resulted from the insucient regu-
lation of public hospital managers’ legal responsibili-
ty for the public hospitals’ outcomes.
e comparison between legal changes and the -
nancial situation of public hospitals revealed that
any nancial relief for public hospitals resulted in
a sharp increase in new liabilities. It strengthened
the “memory of the system” that balancing pub-
lic healthcare entities is impossible, and the state
must bear the responsibility for the debt. e clas-
sic example of a so budget constraint that Kornai
(1979, 1986) described for a socialist economy oc-
curred in practice in the economy of a highly de-
veloped country – Poland.
e ndings showed that more than a third of pub-
lic hospitals are owned by districts, oen needing
help balancing budgets. is fact and many hospi-
tals lead to the generalisation that, in a broader con-
text, this study ts Bolton and Scharfstein (1996). It
shows that the dispersed debt of Polish public hos-
pitals makes it challenging to liquidate an ine-
cient healthcare system when default occurs.
It was only when the debt started to threaten the
uncontrolled suspension of the functioning of
many hospitals that eorts were made to regu-
late this problem systemically. erefore, attempts
were made to make nancial aid conditional on
creating a viable restructuring program for public
healthcare entities, assuming the balancing of fu-
ture operations. e hospitals’ commercialization
program – changing their legal form from public
healthcare entities to commercial law companies
– was an attempt to stop so budget constraint ex-
istence. e program assumed a built-in mecha-
nism limiting the debt to the size of its share cap-
ital. Exceeding it resulted in the obligation to de-
clare such an entity bankrupt. e manager was
also liable for acting to the detriment of the com-
pany. As noted earlier, despite the incentives, the
commercialization of hospitals was small. is
study shows that it is because districts primarily
own public hospitals. e district authorities, the
founding bodies of most hospitals, are subject to
strict regulations on acceptable debt levels. Local
governments in districts have no legal possibility
to conduct business activity and generate revenues
that could nance the commercialization of hos-
pitals. erefore, the commercialization of hospi-
tals owned by districts could not be successful.
Aer the change of government in 2015, there
was a retreat from the liberal direction of reforms.

29
Public and Municipal Finance, Volume 12, Issue 1, 2023
http://dx.doi.org/10.21511/pmf.12(1).2023.03
First, the possibility of formal changes in commer-
cializing hospitals was blocked. However, the re-
sponsibility of local governments for the debts of
hospitals was le. It means signicantly loosening
the budgetary policy toward hospitals, resulting in
a renewed debt dynamics increase.
While this study bears much kinship to that of
Dewatripont and Maskin (1995), a dierence ex-
ists. In this explanation, so budget constraint in
public healthcare entities is not due to the com-
mitment of the state to reduce unemployment.
Instead, the study shows the state’s deliberate ef-
fort to maintain the healthcare system in local
government and maintain a subsidized approach.
It explains why public healthcare entities obtained
nancial support despite being economically
ineective.
CONCLUSION
e primary purpose of this study was to analyze the direction and dynamics of so budget constraint
occurrence in Polish public hospitals and other public healthcare entities. e paper assessed factors
of so budget constraint occurrence in public healthcare entities and complemented the existing so
budget constraint theory. Previous studies have shown, among others, that the state’s role in creating
so budget constraints and subsidizing enterprises resulted from the desire to reduce unemployment.
is study shows that the state makes so budget constraints in the healthcare system, as local authori-
ties own most hospitals. Maintaining the healthcare monopoly of many public hospitals gives them an
advantage in their relationship with the state: their bankruptcy would interrupt the whole healthcare
system. Besides, this study conrms previous ndings and shows that dispersed debt holding makes it
challenging to avoid liquidating an inecient organization when default occurs.
Eective elimination of so budget constraints in public hospitals is possible through their commer-
cialization. However, when deciding to maintain the state’s leading role in the healthcare system and
maintain hospitals as capital companies, local government organizations must be nancially prepared
for this program. e commercialization program failed in Poland due to the mismatch between the
implemented commercialization regulations and the local government’s nancial situation.
As with any research, this study also has some limitations. One is a timeframe. It needs to be longer to
comprehensively evaluate the nancial results of several hospitals operating as commercial companies.
erefore, subsequent analyses should include such hospitals aer several years of operation.
AUTHOR CONTRIBUTIONS
Conceptualization: Zbysław Dobrowolski, Waldemar Sługocki, Marian Kachniarz,
Arkadiusz Babczuk.
Data curation: Arkadiusz Babczuk.
Formal analysis: Zbysław Dobrowolski, Arkadiusz Babczuk.
Funding acquisition: Arkadiusz Babczuk.
Investigation: Zbysław Dobrowolski, Waldemar Sługocki, Marian Kachniarz,
Arkadiusz Babczuk.
Methodology: Zbysław Dobrowolski, Waldemar Sługocki.
Project administration: Zbysław Dobrowolski.
Resources: Arkadiusz Babczuk.
Supervision: Zbysław Dobrowolski.
Validation: Arkadiusz Babczuk.
Writing – original dra: Zbysław Dobrowolski, Waldemar Sługocki, Marian Kachniarz,
Arkadiusz Babczuk.
Writing – review & editing: Zbysław Dobrowolski.

30
Public and Municipal Finance, Volume 12, Issue 1, 2023
http://dx.doi.org/10.21511/pmf.12(1).2023.03
ACKNOWLEDGMENT
e authors thank the Institute of Economic and Financial Expertise in Łódź for nancial support in
publishing this paper.
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