services or falling into loss positions, thereby weakening their ability to provide medical care for the present and future. We fear that the population of the United States will suffer dearly in future years for COLC's alleged "success".

It is important that the members of this Committee, when considering future actions relating to economic stabilization, keep the choices faced by hospitals in perspective.

First, hospitals must purchase the goods and services they use. When the prices charged by their suppliers increase, hospitals, like all other consumers purchasing such goods and services must pay the higher prices. They cannot purchase less without impairing potential care.

Second, hospitals' choice of alternative and lower cost products they can purchase is limited severely by accepted medical standards. For example, a housewife reacting to the inflationary price of petrochemical products might cut down on the use of plastic products in her household or substitute other products with similar functions. But hospital executives have no such choice if there is no equally acceptable medical alternative. Patient safety and high quality care must be the major criteria.

Third, hospitals' choice of product alternatives is determined by the drug, procedure, or service the physician orders. Hospital executives have no legal right to overrule or amend a doctor's medical orders with respect to a patient's treatment, nor do they possess the medical expertise to do so.

Fourth, given the general trend of the economy, necessary expenditures that were deferred because of controls will have to be made at a higher cost when finally made. This is bad business practice and poor economics. It represents a prime example of being "penny wise and pound foolish.”

Therefore, in considering the advisability of future controls for hospitals and in assessing the "success" of the current program, it must be kept in mind that the record of controlling "hospital" charges during the stabilization program was achieved by requiring hospitals to keep prices within a rigid range without regard to the current costs they were required to incur and without evaluating the results of controls as they relate to the ability of hospitals to continue to meet patient needs now or in the future.

There is no doubt that COLC regulations have already had a severe effect on the nation's religious and other community hospitals.

Even before the Economic Stabilization Program was instituted hospitals had undertaken cost containment programs to ensure that no unnecessary costs were incurred. The imposition of price control regulations forced hospitals to take far less desirable actions to fill the gap created by the rapidly rising prices of items they must purchase and the limited extent to which they can increase their charges. They have, for instance, deferred purchasing needed medical equipment; they have depleted reserve funds accumulated to replace obsolescent buildings and equipment; and they have discontinued needed programs.

These effects are detrimental to health care in this country, and over the long run will have increasingly harmful results. Despite such measures, hospitals' expenses have increased far more rapidly than their revenues; APHA and CHA calculate that in the aggregate 205 surveyed hospitals made a "profit" in 1971 of approximately $3,000,000 on revenues of $1,400,000,000, but lost about $35,000,000 on revenues of $1,700,000,000 in 1973.

A continuation of the existing situation would lead to substantial difficulties for the hospital system in the months ahead. Quality of care, implementation of new medical technology, and the attractiveness of health care careers will decrease as these trends continue. And in some instances, operating expenses will not be paid and mortgage and loan payments will be defaulted.

PHASE IV COLC REGULATIONS

Between September, 1973, and the promulgation in the Federal Register of COLC's Phase IV regulations for hospitals (and the entire health care industry) on January 23, 1974, the National Protestant-Catholic Hospital Action Committee filed written petitions with COLC and met with its representatives several times to persuade COLC to remove the disparity in its program which allows all other segments of the economy to increase prices on a dollar-for-dollar basis when their costs increase, while allowing hospitals price increases at a fixed percentage that is well below the national rate of inflation. Yet COLC's Phase IV regulations, although recognizing certain aspects of our recommendations

mandated that price increases of hospitals remain subject to a fixed and rigid percentage of 7.5 percent.'

Yet inflation is continuing at a rapid rate. A rise in food costs in 1974 of 16 percent was predicted by the Agriculture Department on February 15, 1974. The Wholesale Price Index for January 1974 was 3.1 percent higher than December 1973. Annualized, that is a rate of inflation of 37 percent for 1974, or 55 percent in the period 1973-1974. Indeed, Arthur F. Burns, Chairman of the Federal Reserve Board System has predicted in testimony before the Joint Economic Committee (February 26, 1974), that inflation will rise throughout this year: "inflation is proceeding at a dangerous pace. . . [and] strong inflationary forces are likely to continue in 1974 . . .` ." These illustrations of the unpredictability of future costs makes controls for hospitals a sheer political gamble. The only loser is the patient.

Phase IV regulations applicable to hospitals also introduce a wholly new price control mechanism by placing controls on average charges or cost per admission rather than on charges for individual services or aggregate revenues. By introducing this new concept, COLC apparently seeks to control the intensity of medical treatment a hospital is allowed to offer individual patients. Not only is the control of medical treatment beyond the statutory authority of the COLC, it is beyond the control of hospitals, which have no legal right to prescribe or alter the type or amount of care a patient's physician orders. Therefore, new COLC controls use as the measure of compliance an index over which hospitals have no control.

PENDING LEGAL ACTION

On January 23, 1974-the day the Phase IV regulations were promulgated in the Federal Reporter-the American Protestant Hospital Association and The Catholic Hospital Association, joined by the Michigan Hospital Association and a named hospital, filed suit in the U.S. District Court for the District of Columbia asking the court to enjoin the enforcement of Phase IV COLC regulations as they relate to hospitals. The suit asks the court to rule that any new regulations issued must allow hospitals to reflect in their charges and reimbursements through the Medicare and Medicaid program the increased costs they must pay their suppliers for goods and services purchased. The suit was required because the nation's religious and other community hospitals cannot continue to offer a quality of health care that is acceptable to the public and to their own conscience unless revenues are sufficient to pay for the goods and services they must purchase and wages that they must pay to retain qualified and valued employees. The aspect of the suit challenging the COLC's right to reduce Medicare and Medicaid reimbursements, which are established pursuant to formulas promulgated under the Social Security Act, has already been upheld by the United States District Court in another suit. It ruled that COLC régulations limiting reimbursements to less than the reasonable costs permitted by the Social Security Act are invalid and contrary to law. American Ñursing Home Association v. Cost of Living Council, No. 1773-73, United States District Court for the District of Columbia, opinion entered February 7, 1974.

ADMINISTRATION RECOMMENDATIONS

In his statement introducing the COLC's Phase IV regulations relating to hospitals and in his statement before this subcommittee, Dr. Dunlop recommended that the economic stabilization program be terminated for all segments of the economy but petroleum and health care, and that present health care regulations be kept in place until a national health insurance law is enacted. But how can hospitals continue to offer an acceptable level of health care when suppliers will be able to charge hospitals any price they wish, while hospitals must maintain their charges at stringently fixed levels?

The result of adopting the Administration's recommendations is abundantly clear it will mean the further weakening of hospitals' ability to maintain the quality and level of services they can offer. It will require reductions in optional and unprofitable services such as free care, emergency room service, and other expensive but necessary hospital services. It will require greater and greater

1 Hospitals are permitted to recover actual costs in only two limited areas. The current regulatory scheme permits them to recoup 85 percent of their costs for fuel and all costs related to certain approved capital expenditures.

federal subsidies to hospitals to avoid bankruptcies, and will result, we believe, in the eventual end to the voluntary health care system in the United States. Yet, even if, as has been proposed in H.R. 13206, the Economic Stabilization Act is merely extended without specifically adopting the Administration proposal for the health care industry embodied in S. 3032, the Administration will be able to continue its discriminatory price control policies for hospitals after April 30. Under its announced policy, if Congress extends the Act without specific protec tive language for the health care industry, the Administration will quickly complete its decontrol of the remainder of the economy, except for health care and petroleum, thus leaving hospitals subject to fixed percentage price control without regard to its cost increases, while freeing all other sectors to charge hospitals any price they wish.

In S. 3032, the Administration sponsored bill introduced in the Senate, the Administration seeks to overturn by legislation the District Court's decision in the American Nursing Home Association decision discussed above (see Section 3(h) of § 3032). The Administration would also have the Congress accord to it the authority to control total health care expenditures. Such authority would seem to endow the COLC with the right to control the type and amount of medical care doctors are able to accord to individual patients and perhaps to determine which patients shall receive care and which shall not. Armed with such unprecedented authority, the COLC could "budget" medical care and make medical judgments on the treatment of patients even though it completely lacks any medical expertise which qualifies it to make such judgments. Judgments on the care of individual patients can only be made by doctors wholly acquainted with the case and with the necessary training to make sound medical judgments.

We find the Administration recommendations to be unrealistic and excessive for the reasons stated above and misguided in view of the financial condition of the nation's hospitals and the inflation rate of the general economy.

CURRENT LEGAL AUTHORITY FOR PRICE CONTROLS

It must be emphasized that there are ample provisions in the law to ensure that hospitals do not unreasonably incur costs. These provisions, moreover, are administered by HEW, which has more medical expertise than COLC and has had experience in administering medical programs.

Under the present law HEW ensures that hospital charges for Medicare and Medicaid service represent "reasonable costs", and it has been developing standards and expertise in applying that standard over the past seven years. In addition, recent amendments to the Social Security Act effected by P.L. 92–603 further ensure that hospitals are reimbursed only for their reasonable costs. The provision of the Social Security Act applicable to hospitals' reimbursement for Medicare and Medicaid services, as amended by Section 223 or P.L. 92-603, provides that in determining the reasonable costs of the services, "any part of incurred cost found to be unnecessary in the efficient delivery of needed health services" shall be excluded, 42 U.S.C. §1395x(v). Section 221 of P.L. 92–603 (42 U.S.C. §1320a−1) provides that Government funds will not be expended to support capital expenditures (expenditures which aggregate more than $100,000) by hospitals unless they have been approved by State planning agencies as being necessary. And Section 249F(b) (42 U.S.C. §1320C) provides for Professional Standards Review Organizations to ensure that hospital services reimbursed under Medicare and Medicaid are necessary and are economically, effectively, and efficiently provided.

PROPOSALS OF NATIONAL PROTESTANT-CATHOLIC HOSPITAL ACTION COMMITTEE

We believe that this Committee must correct Administration policy which can only result in the reduction in the quality of medical services that can be offered by hospitals. This can be accomplished by the following alternative means:

(1) Expand the Administration's proposal and end price controls for hospitals. Such a termination, we believe, would result in increases in hospital charges only to reflect the increased prices they must pay for their goods and services and to maintain a level of wages paid to its employees equal to the wage rates in the remainder of the economy. Hospital charges would not increase at a greater rate than would prices charged by the remainder of the economy.

On December 5, 1973, at a press conference called by the National ProtestantCatholic Action Committee to discuss its reaction to proposed Phase IV COLC regulations for hospitals, we stated that hospitals should raise their rates no more

than necessary to reflect rises in costs and to maintain reasonable profits. We are confident that if controls are terminated that this will be the case and our members are committed to this goal.

As discussed previously, even if controls on hospitals are removed, the Federal Government is not powerless to control hospital costs. Pursuant to the 1972 amendments to the Social Security Act, the Government has the right to police unreasonable costs, to control major capital expenditures of hospitals and to review the procedures of doctors for cost effectiveness pursuant to the Professional Standard Review Organizations. A conscientious enforcement of these existing statutory tools could effectively control unnecessary hospital costs without resorting to a continuation of the current discriminatory method of control which can only result in the reduction of a hospital's ability to offer quality health care. (2) In the alternative, we believe that this Committee should consider legislation which requires evenhanded price control for all segments of the economy. That is, if hospital price increases must be limited by a fixed percentage, prices of its suppliers would be similarly controlled. And when exceptions are granted to alleviate special situations, such as the decontrol of certain industries to increase domestic supply, exceptions must be granted to all persons in the economy affected by the decontrol-including hospitals. To do less is to endanger the very existence of the voluntary health care system in the United States.

However, if the Committee concludes that it cannot adopt these alternative recommendations, we urgently submit that any legislation extending the Economic Stabilization Act must assure that hospitals recover their costs and maintain a reasonable profit. To do less for any industry is unfair and inequitable in that it imposes losses on individual businessmen and endangers their investments. But to do less for hospitals endangers the very lives hospitals and treating physicians seek to preserve.

In closing, we must stress that hospitals and their boards of trustees recognize their obligation to continue to provide the services for which they were organized. Current Government regulations do not allow hospitals sufficient revenues to do so, to the serious detriment of the American public. We urgently request this Committee to remedy the current situation in a fair and equitable manner.

STATEMENT OF MICHAEL D. BROMBERG, DIRECTOR, NATIONAL OFFICES ON BEHALF OF FEDERATION OF AMERICAN HOSPITALS

Mr. Chairman and Members of the Committee, my name is Michael D. Bromberg, Director of the National Offices of the Federation of American Hospitals. We would like to thank the Committee for the opportunity to present the Federation's views on the proposed extension of the Economic Stabilization Program.

There are more than 1,000 hospitals, containing over 85,000 beds, in the investor-owned hospital industry. They provide services to an estimated 3.2 million admissions and 2.1 million outpatient visits annually. Not only do these hospitals deliver quality health care, they also pay a substantial amount in taxes (amounting to $110 million in federal and state taxes and $27 million in local property taxes last year alone).

When the final Phase IV regulations for the health industry were issued in January, Robert C. Crosby, immediate past President of the Federation, called them "an improvement over the proposed regulations and a more flexible control system than Phases I through III. the Phase IV regulations offer some relief to our industry by eliminating the rigid profit margin and cost justification features of prior controls". He went on to state his confidence in the ability of our industry to comply with the new regulations, while planning, at the same time, for the elimination of controls as soon as possible. The Federation was one of the few associations in the health field which has not yet brought suit against the Cost of Living Council as the result of Phase IV controls. While we certainly did not endorse the controls, we were willing to make the best of the situation until such time as these controls would be lifted.

However, in light of the Administration's recent push for the extension of controls in the health field alone, (beyond the original cut-off date of April 30, 1974) established for all sectors of the economy, the health sector has been placed in a completely untenable position. In testimony before the Senate on February 7th, Dr. George Shultz and Dr. John Dunlop representing the Administration, singled out the health field as the sector most in need of continued control due to its

"inflationary potential". This testimony was followed up with the introduction of S. 3032, the Administration's bill providing for the extension of the Economic Stabilization Act of 1970. The bill calls for decontrol of all sectors of the economy excepting health, stating that, it is necessary to continue the economic con

trols established prior to May 1, 1974 with respect to the health care sector of the economy (including health insurance) on an interim basis pending Congressional consideration of a comprehensive health insurance plan." The bill goes on to single out hospital expenditures in particular, stating the necessity of stabilizing the cost of a hospital stay. In addition, the legislation, if passed, would give the President the authority to issue guidelines for determining wages, salaries, prices, and aggregate expenditures in the health care sector.

In his Senate testimony, Dr. Dunlop cited statistics which reflected the constraint in cost increases in the health industry. The rate of increase in semi-private hospital rooms dropped from 19.8 per cent in 1967 to 5.4 per cent in the period from 1971-1973. Expenses per admission dropped from increases of 14.4 per cent in 1969 to 7.4 per cent in 1973. In a study completed by the Federation of American Hospitals, statistics show that during the calendar year ending December 31, 1972, 111 investor-owned hospitals out of a total of 206 responding, instituted price increases of 21⁄2 per cent or less. Another 92 hospitals increased prices over 21⁄2 per cent through 6 per cent, while only 3 hospitals increased prices over 6 per

cent.

Only the day before Dr. Dunlop's testimony, President Nixon, in a speech before the American Hospital Association, had praised the health care industry for cutting the inflationary rate of medical prices in half. He stated that, "One of the most inflationary sectors of our economy has thus become one of the least infla tionary."

In light of the above statistics, it is intolerable the the health industry should be treated in such a harshly discriminatory and inequitable manner as that proposed by S. 3032. The Administration is seemingly so concerned with providing top health care for all citizens, that it has seen fit in the past few weeks to assign a top priority to its health messages, fact sheets, and introduction of its own plan for national health insurance. This concern for quality health care seems short sighted in the extreme if the Administration cannot perceive the adverse impact on health care inherent in permitting decontrol of all sectors of the economy save health. At least under Phase IV regulations the health industry could strive to work within federally imposed guidelines because other industries were placed in a similar position of compliance.

Now, with the proposed abandonment of controls in other industries, the 7.5 percent budget increase permitted hospitals becomes totally unrealistic.

The quality of health care is bound to suffer. Our industry will be unable to attract the best personnel available to staff hospitals because we will be unable to compete with other industries who will not be laboring under the burden of controlled wages and salaries. No industry is entirely self-sustaining, and the hospital industry, even more than most, depends upon outside suppliers for products ranging from beds to food to bandages. With the expected escalating costs charged by our suppliers once their controls are lifted, it will become increasingly more difficult for the hospital to afford the best products available. And if hospitals must settle for second-best, then it is only too obvious that the patients they treat will be the losers also.

The Administration charges the costs would soar should controls be lifted from the health industry prior to the passage of a national health insurance plan. They point to the rise in prices following the enactment of Medicare-Medicaid legislation in the mid-'60's. Although it is true that health costs and expenditures did rise, this was in part dictated by the simple law of supply and demand. All of a sudden the health care industry was flooded with demands for treating the aged and those in low-income groups. The demand for services was greater than the ability to supply them, and costs rose. However, as the statistics cited by Dr. Dunlop demonstrate, this has long since subsided. Therefore, it is not reasonable to compare cost increases associated with Medicare-Medicaid with the current situation should controls be lifted, because the situation itself is not comparable. Investor-owned hospitals operate on the principle of efficient management and cost control. They are able to achieve cost constraints without making any sacrifices to quality health care, by relying on such management techniques as bulk-buying of supplies and the use of a centralized computer system for coordinating the activities of the hospitals concerned. We strongly support the concept of prospective rates, negotiated locally between hospitals and insurance companies,