sation for health services. This is a very touchy question that will be continually before Congress in the context of its debates over natonal health insurance. However, while these questions of significant national importance are being considered by the House and Senate, it seems quite inappropriate to delegate almost unlimited authority to the Cost of Living Council.

We feel even more strongly about the purported abrogation of three titles of the Social Security Act as proposed in S. 3032 and we question whether the Cost of Living Council should be authorized to ignore the detailed provisions worked out by the House Ways & Means Committee and the Senate Finance Committee for Medicare and Medicaid reimbursement. Although the Cost of Living Council may feel that the cost reimbursement provisions are not the best formula for reimbursement, we believe that the appropriate avenue to change Medicare and Medicaid reimbursement is to amend the Social Security Act rather than the backdoor approach that is being suggested in S. 3032.

Because the Cost of Living Council is not the appropriate body for making health policy and because there can be no basis for permitting repeal of the Social Security Act by regulation, we believe that Congress should reject the latter two purposes advanced by S. 3032.

Control Efforts Have Been Arbitrary and Unrealistic.

With respect to the first proposal, that of controlling inflation, I believe a brief look at what the Cost of Living Council has done and is proposing to do will give this Committee a better understanding of the implications of the authority you are being asked to grant the Cost of Living Council. To appreciate the impact of the Cost of Living Council program, a little background might be useful.

1. General background

Over the past ten years, there has been a significant expansion in the number of nursing home beds in this country and continued growth in this area is required to serve the medical needs of the increasing number of senior citizens in this country and also to permit the movement of many hospital patients into nursing home facilities.

The nursing home industry, in contrast to the hospital industry, has been dominated by private ownership and it can be expected that it will continue to be so. Thus, any regulatory program for nursing homes must permit the operators to recover their costs and to have an opportunity to operate on a profitable level. Without such a regulatory framework, it will be impossible to attract the necessary capital investments for expansion or even to provide the capital needed for renovation and improvement of existing facilities.

The nursing home industry in the state of New York, like all other businesses, has been severely affected by the escalating costs of running a business. About 70% of the operating costs of our nursing homes constitute wage costs. Over the last ten years there has been a significant increase in the wage level in the health area, particularly in situations where unions have organized the employees. In Nassau County and in the city of New York, most of the nursing homes are operating under union contracts. These two jurisdictions have over half of the nursing home beds in the state of New York. As a consequence of increasing the wages of these employees, there has been a necessary increase in the cost of providing health care.

In addition to the wage costs, the other cost incurred by nursing homes relate to items such as food, medical supplies and fuel, items which have increased dramatically in cost over the past several years.

Nursing home operators in New York generally favor government efforts to control the cost of the goods and services that they must purchase. To the extent any effective program can be devised to keep down the cost of labor and to keep down the cost of food and fuel and other items, there will be a direct impact in keeping down the cost of medical care. Thus, when the initial Phase I and II regulations were announced by the Administration, there was general support in the industry for the concept. However, the actual implementation of the program for nursing home operators during Phase I and Phase II and now Phase IV has been so arbitrary, so unfair, and so counter-productive that we now have grave reservations about the validity of the exercise.

2. Cost of Living Council health controls

I would like to outline briefly for you the arbitrary nature of the program that Cost of Living Council has devised for the nursing home industry:

First, under the general Phase II rules, the Cost of Living Council established a basic rule permitting dollar-for-dollar pass-through of increased costs, subject to a profit margin limitation, with a guaranteed profit margin of 1% for service industries. This rule, however, was not applicable to nursing homes, which could only pass through costs up to certain limited amounts. These limited amounts were 5.5% increase in wages and 2.5% increase in non-wage costs. In addition, there was no guaranteed profit margin so that an institution that had lost money during the base period was required by regulation to continue to lose money at the same rate in the future. Thus, as its volume increased it had to increase its losses. This arbitrary discrimination against the nursing home industry cannot be justified.

Second, the 5.5% and the 2.5% rules that the Cost of Living Council adopted were not supported by factual data. For instance, although the Cost of Living Council established a 5.5% wage standard, they approved increases in the health industry greatly in excess of 5.5%. The Pay Board approved 7% wage increases in Nassau County and in the city of New York during 1972. The situation for 1973 is similar with another 7% increase in wage levels approved for Nassau County. Even greater increases for New York City are expected as a result of the recent action of the Health Industry Wage and Salary Committee recommending approvals averaging about 12%. Although the Cost of Living Council approves these wage increases beyond the 5.5% standard, the individual nursing homes are not permitted under the price controls to increase their prices to reflect these increased costs.

The establishment of a 2.5% limitation on increased non-wage costs is just as arbitrary and unrealistic. When Phase II was initially proposed the Administration stated its objective as holding the annual price increases to 2.5% a year. Based on this objective, the Cost of Living Council required the nursing homes to meet that same objective by refusing to permit them to reflect any cost increases above the 2.5% level. As this Committee is well aware, the rate of inflation has never dropped anywhere near the 2.5% level and on an annual basis has been running 7 to 8%. Although the Administration has totally failed to meet its objective, the Cost of Living Council still requires nursing homes to behave as if the Government had been successful. As a consequence, nursing homes have not been permitted to pass on increased costs represented by the difference between the 2.5% the Administration hoped for and the 7 to 8% that actually occurred. Although these Phase II rules have been modified for Phase IV, the changes are negligible. Now instead of having specific 2.5 and 5.5% limits, the nursing home industry is limited to a 6.5% increase per year. This limitation will be applied by the Cost of Living Council without regard to the actual cost increases that occur. This year the combination of increased wage costs, increased food costs, and increased capital costs to meet the requirements of Congressionally enacted standards such as the Life Safety Code will certainly exceed the 6.5% limit laid down in the Phase IV rules.

Third, although the Cost of Living Council attempts to defend its arbitrary limitations by pointing to an exception procedure, which permits nursing homes to exceed the arbitrary limitations if hardship can be established, in reality this exception procedure has been administered on an arbitrary and confiscatory basis. First, the Council attempts to assess whether these increased expenditures were "reasonable." This assessment is made without any established criteria as to what constitutes "reasonable," and by Cost of Living Council officials who have neither expertise in the health area nor the opportunity for firsthand observation of the facilities. Thus, review by the Cost of Living Council amounts to overruling local authorities which have established criteria for nursing home services in a particular area, contrary to the expressed intent of Congress to support the local planning concept in the health area.

More importantly, however, the criteria for hardship, established by the Cost of Living Council is negative cash flow. Although there are serious doubts in my mind as to the validity of the way the Cost of Living Council measures cash flow, the real inequity occurs in that the Cost of Living Council will routinely require nursing home operators to continue to operate at an accounting loss on the nebulous assertion that they, as the Cost of Living Council determines at that time, have a positive cash flow. In reality, the Cost of Living Council is attempting to deny the existence of depreciation expenses as legitimate business costs contrary to the expressed requirements of the Medicare/Medicaid laws and in direct contravention of established accounting practices.

E 3. Mayfair Nursing Home

Treatment of one of my nursing homes, the Mayfair, is typical of Cost of Living Council actions in this area. The Mayfair Nursing Home is a modern, 200 bed nursing home that provides a full range of nursing care, physical therapy and recreational facilities for its patients. Because of increased wage costs approved by the Cost of Living Council, expenses at this facility have increased in excess of the limitations, and thus we were forced to file for an exception.

The Cost of Living Council has issued long and complex forms that must be completed by all nursing homes. They have also established State Advisory Boards to review requests for exception and furnished those bodies with detailed guidelines. We incurred great expense to prepare the forms and submit these to New York State officials acting as the State Advisory Board. After responding to all their questions, the State Advisory Board recommended that an exception be granted. We then went to the Cost of Living Council and even though we were operating at a loss and in spite of the favorable recommendation of the State Advisory Board, we were turned down.

The impact of the limitations of the Cost of Living Council can be graphically demonstrated by noting that Mayfair was able to earn in 1971 an operating profit of $119,000. In 1972, the controls squeezed our operating profit to $36,000; and in 1973, we have been forced to incur a lo s of $30,000 plus. The equity value of the Mayfair partnership is about $1 million and represents a significant portion of the net worth of the individual partners. As a result of the Cost of Living Council policies, the value of this investment has been significantly impaired without any justification. Our cries of hardship and inequity have fallen on deaf

ears.

Consequences of Cost of Living Council Policies

The consequences for the nursing home industry of the past and announced future policy of the Cost of Living Council are serious.

First, since controls are being abandoned in other sectors of the economy, the nursing home industry will receive no protection with respect to the cost of the items that it must purchase. In addition, the continuation of the existing policy of the Cost of Living Council of granting increases beyond 5.5%-which may be justified in light of the need for workers to have their earnings keep pace with the rising cost of living-will give very little effect to the proposed pay controls. As a consequence, if the nursing home industry is held to arbitrary ceilings that are below the actual cost increases, the operators will either be forced out of business or required to cut back essential services to nursing home patients. Second, without the elimination of arbitrary controls, the financial soundness of the industry will be severely jeopardized and efforts to implement the Life Safety Code will be thwarted.

Finally, many of the questions of cost containment in the nursing home area have been thoroughly debated by the House Ways and Means Committee and the Senate Finance Committee in connection with the Medicare/Medicaid programs. These Committees have enacted various provisions to deal with the problem of controlling costs, while at the same time assuring that Medicare and Medicaid programs do not interfere with the delivery of first rate medical care. The Cost of Living Council's arbitrary limitations will specifically interfere with these programs and will serve to undo much of what Congress has sought to provide.

As this Committee may be aware, the Phase II, III and IV regulations have been enjoined by the U.S. District Court here in Washington to the extent that they apply to nursing homes. The Court has held that the regulations are without any rational foundation, that they are arbitrary and capricious and that they violate the Medicare/Medicaid laws. We believe the Federal Courts are correct and that Congress should not permit the Cost of Living Council to continue its abuse of discretion.

CONCLUSION

As the Committee can see in examining the recent record of the Cost of Living Council program in the health area, the attempt to control inflation in the nursing home area has resulted in an unbelievable abuse of discretion causing havoc in many nursing homes. The meat-ax approach represented by the arbitrary ceilings established by the Cost of Living Council has created tremendous hardship and uncertainty in the nursing home industry and will jeopardize the ability of this industry to respond to the health needs of the American citizen. Moreover, the

arbitrary actions of the Cost of Living Council in approving significant wage increases while denying the right to nursing homes to pass these increased wage expenses on in the form of higher prices raise substantial questions of due process. This regulatory scheme, which forces nursing homes to absorb wage and material cost increases, even to the point of operating at a deficit, creates burdens and inequities which may have been considered justifiable for a short-term period to support certain national economic goals. However, to continue these regulations, in the presently modified form, over a period of several years or more, undermines the financial soundness of this sector of our economy. Controls have been lifted from other sectors because of the distortions they created including shortages, hardships and limits on growth. These regulations are unworkable as a system of long-term control of nursing homes. Controls are unsound which expect nursing homes to absorb cost increases until all cash reserves are used. Any long-term control system, such as those for public utilities, must provide for price adjustments to reflect cost increases and to permit an operating profit.

Because of the complete lack of foresight and fairness on the part of the Cost of Living Council, we unfortunately must recommend that the Economic Stabilization Program for nursing homes be terminated as of April 30, 1974. Continuation of it would only serve to jeopardize the financial position of most operators, to interfere with the ability of the homes to comply with other provisions of Federal law and to prevent employees in the health industry from attaining the $3.50 per hour low wage minimum expressly established in the Economic Stabilization Act. However, if the Committee decides that some controls over nursing homes are necessary, then we believe that it is absolutely essential that specific statutory limitations be placed on the authority of the Cost of Living Council. We suggest two important areas.

First, no interference should be permitted with the operation of the Medicare, Medicaid systems. These systems are already intricate and complex, providing for detailed review of the operations of the nursing homes that receive Medicare/ Medicaid funds. It is completely unnecessary to superimpose on the Medicare! Medicaid system the Cost of Living Council regulations. The unwarranted action on the part of the Cost of Living Council has already been enjoined by the Courts and should not be countenanced by this Committee.

Second, to the extent that limitations on price increases are permitted, these limitations must reflect the following factors:

(a) All actual wage increases as approved by the Cost of Living Council. (b) The general inflation index of the economy.

(c) The right of reasonable operating profit.

The Administration's announced Phase IV rules for the nursing home industry indicate a direct intent on the part of the Cost of Living Council to ignore these suggestions and thus the only hope that this industry has for fair treatment is in the form of Congressionally enacted statutory limitations.

Mr. Massey and I would be glad to answer any questions that you may have. Mr. GETTYS. Thank you, Mr. Cutler. So far I have not heard much commendation of the Cost of Living Council.

The gentleman from California, Mr. Burgener, has noted that the witnesses are arranged in such an order that the doctors and dentists are separated, and he has requested that Dr. Williams at this point be called upon, and then resume the procedure. If there is no objection, the Chair will grant that request.

Dr. Williams.

STATEMENT OF DR. CARLTON H. WILLIAMS, PRESIDENT OF THE AMERICAN DENTAL ASSOCIATION; ACCOMPANIED BY BERNARD J. CONWAY, ASSISTANT EXECUTIVE DIRECTOR FOR LEGAL AFFAIRS

Dr. WILLIAMS. Thank you very much, Mr. Chairman.

Mr. BURGENER. If we can have the food people and the medical people--I think maybe we jumped over Mr. McMahon, but we will get right back.

Dr. WILLIAMS. Good morning, gentlemen.

First of all, I want to thank Mr. Burgener for the nice remarks and to recognize that we are very fortunate to have Mr. Burgener as our Representative in Congress, and I am very proud of that fact. Mr. BURGENER. That was as per terms of our agreement. [Laughter] Dr. WILLIAMS. I also have a statement, I will present to the record and begin with a short statement explaining the-

Mr. GETTYS. Thank you. Your full statement will be in the record. Dr. WILLIAMS. Mr. Chairman and members of the committee, I am Carlton H. Williams of La Mesa, Calif., president of the American Dental Association. The association has 105,000 active and life members, which is 84 percent of the Nation's dentists. With me today is Bernard J. Conway, the association's assistant executive director for legal affairs.

I appreciate the opportunity to appear here today to present a statement of the association's position on the bills-H.R. 13206, S. 3032, S. 2961-that have been introduced to extend the Economic Stabilization Act after April 30, 1974.

In the interest of the committee's time, I would like briefly to summarize the association's position and request permission to submit for the record a more detailed statement together with an independent study by Dr. John R. Glennie of Lewin & Associates, Inc., Washington, D.C., which was included as part of the association's petition to the Cost of Living Council for relief from the continuing harsh controls imposed upon dental practitioners under the phase 4 regulations. (The study referred to by Dr. John R. Glennie may be found on page 459.)

In that context, I might add that the Cost of Living Council has not seen fit to respond to the association's petition or refute in any way the facts contained therein. We have been forced, therefore, to institute remedial action in the courts at significant cost to us and the Government.

With respect to the legislation pending before the committee, the association is opposed to any extension of the Economic Stabilization Act. This position is based upon many factors including:

One, economic data gathered by the Federal Government showing that in the 4-year period immediately preceding the economic stabilization program, dental fees increased at a lower rate than those of all services aggregated. The dental profession cooperated during the freeze and early phase 1 control period, and this resulted, again according to Government figures, in even lower rates of fee increases, despite the removal and relaxation of controls over large segments of the remainder of the economy.

Thus, the record demonstrates that over the past 6 years, including the 21⁄2 years of the economic stabilization program, costs of dental care have not contributed and are not now contributing to the escalation of the Nation's serious problem of inflation.

Two, nearly 3 years of experience with the harsh, inequitable, and unrealistic controls, placed in arbitrary fashion upon dental practitioners, demonstrate that those who administer the economic stabilization program are unwilling to consider the economic facts of life relating to dentistry, but instead are determined to reach a preconceived social objective; that is, a regulation of incomes, expendi