“Cronyism.” That word is likely to be thrown around a great deal over the coming months in the Republican primary battle. Cronyism is bad when, for example, it’s done to lure companies to locate in a particular state, but it’s worse when 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 plan, the widely acknowledged model for Obamacare.
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 line.
To get the 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 just 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’ expansion. According to MIT Professor Jonathan Gruber, “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.”
As it turned out, the cost of these subsidies made the difference for Romneycare’s financial stability, at least in the short term. As the system faced 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 run, the institutional subsidies and ever-increasing costs of coverage–Massachusetts’ 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.
Such corporate cronyism abounds in government today. When states are competing for new jobs from prospective employers, governors of all political stripes use special favors to try to woo business to their state. Nearly all governors have slush funds of various sizes to deploy for such occasions, consisting of tax abatements, credits, and other incentives.
These favors don’t deliver public benefits. After all, if Texas’s roughly $200 million slush fund were the reason the state has produced four of five net new private-sector jobs in the United States in the past five years–with 88 percent within the past two years coming from the private sector–every state would have similar success in job creation.
There’s a right way and a wrong way to try to attract jobs. The right way is by ensuring a transparent legal and regulatory environment, with low taxes and a solid educational system, and creating an educated populace well prepared to fill jobs for generations. The wrong way is 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 corporations.
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.
Benjamin Domenech ([email protected]) is a research fellow at The Heartland Institute and managing editor of Health Care News.