Romney’s cronyism problem is emblematic of contemporary politics

“Cronyism.” That word has been thrown around a great deal in the Republican primary battle. It’s bad when it’s done to lure companies to locate in a particular state, or to reward a political ally, but it’s worse when it’s used to increase government intrusion into people’s lives. That’s what happened when former Massachusetts Governor Mitt Romney pressed to get support for his health care reform, the widely acknowledged model for Obamacare.

The back story here is little known, but very damning. According to a 2008 report by the Heritage Foundation, at the time of Romneycare’s passage the two largest safety-net hospital systems in Massachusetts — Boston Medical Center (BMC) and Cambridge Health Alliance (CHA) — had “become dependent on direct subsidies” and were concerned that, even accounting for the significant rate increases allowed under the new law, a shift to Medicaid managed care would hurt their bottom lines.

So to get his signature health care law passed, Romney and his allies agreed to a host of annual payments — including “MCO supplemental payments,” “disproportionate share hospital” payments and special “hospital supplemental payments,” targeted exclusively for the two systems.

At the last minute, more than $540 million in so-called “Section 122 payments” were inserted into the law, designed to supply BMC and CHA with an even bigger financial cushion over the next three years. In practice, these funds — which included federal, state and local taxpayer money — served as direct subsidies for the two providers’ expansions.

According to MIT Professor Jonathan Gruber, one of the designers of Romney’s law and one of the experts who consulted with the White House on Obamacare, “The federal government was essentially supplementing the expansion of these inner city hospitals.” When some lawmakers suggested cutting back on the amounts, provider officials complained about all the great programs they’d have to shut down — such as BMC’s “food pantry.”

The irony is that the corporate cronyism it took to get Romney’s law passed proved its financial undoing, at least in the short term. As it turned out, the cost of these subsidies made the difference for Romneycare’s dubious financial stability.

Facing higher than expected enrollment, the Section 122 payments forced Massachusetts to prioritize more money for the required earmarks to BMC and CHA — money that might otherwise have been used to cover costs of patient care. According to the Heritage Foundation, in 2008 “Section 122 payments come to $180 million, while Commonwealth Care overruns are $153 million. … In effect, the state was subsidizing institutions, not patients.”

In the long term, the institutional subsidies and ever-increasing costs of coverage — Massachusetts’s premium costs have skyrocketed since Romneycare’s passage and are now the highest in the nation — are taking their toll on the fiscal sustainability of Romney’s plan. The latest estimates indicate that over the next decade the law will cost $2 billion more than Romney and his allies predicted. And Massachusetts is now considering the creation of its own equivalent of President Obama’s federal Independent Payment Advisory Board to clamp down on costs.

Corporate cronyism abounds in government today to an uncomfortable degree. By picking winners and losers directly in the halls of government — preventing competition, rewarding rent-seeking behavior and enshrining into law direct transfers from the taxpayers to corporate entities — leaders break faith with the constituents they claim to represent.

This is a lesson the federal government could stand to learn, along with state and local governments. Creating a friendly climate for business and job creation takes a lot more than writing a check with somebody else’s money.