Late to this discussion but I had to sleep...
Several others are correct. Each city contributes a %increase to the cost of any future policies, and this policy reduces that %increase.
This is terribly, terribly wrong.
Personally, I see it this way: Without an underlying balance to the game, the rest is meaningless. The AI can't handle 1upt? What does that matter when you can exploit the game in a dozen different ways anyway and are guaranteed a win?
To use your broken leg analogy... To me, they've just stitched up the stab wound in your back. Sure, your leg is still broken, but this was rather more important as a first step.