that health wage increases have lagged behind those of other workers during the past 2 years. In just the period of Phase IV, from January 1973 until November 1973, average hourly earnings of nonsupervisory hospital employees rose 13 cents or 4.1 percent while those of the average private industry worker rose 23 cents or 6.1 percent. Certainly this is inequitable.

The Cost of Living Council in late 1971, established a 5.5 percent wage standard based upon a 3 percent general productivity factor and a projected 21⁄2 percent inflation factor. That standard has not been adjusted for the changes that have occurred during the past two years. Today with the Consumer Price Index increasing at a 8.8 percent rate, the Health Wage and Salary Committee of the Cost of Living Council is still applying a 5.5 percent standard. As a result, many workers are suffering a real cut in their earnings and can purchase less food and clothing this year than they could a year ago. On the other hand, hospitals are able to pass on legitimate cost increases to the insurance carriers and other payers. As a matter of fact, the increases in average hourly earnings for hospital workers during the last year were less than 5.5 percent. Even in negotiations, a number of employers in spite of the current inflationary situation, are seeking to force workers to take a cut in real purchasing power, and the employers hide behind the outmoded 5.5 percent standard as justification.

In addition to the problems of inequitable application of the wage standard, the health care workers are further plagued by interminable delays in attaining approval of wage increases. After cases are filed, it generally takes at least four months for the case to be acted upon and in many situations the delay is much longer. On the other hand, under the new price regulations, hospital price increases can be effectuated if the parties do not hear from the Cost of Living Council for sixty days. However, even after hospitals receive wage approval from the Cost of Living Council, they still must seek price approval for such adjustments if price changes result. The wages to be paid workers are thus second-guessed a second-time by the Cost of Living Council.

The Administration claims that they need to maintain controls over the health industry because of the impending national health insurance legislation. However, they failed to tell the Committee that they currently have no mandatory price controls over the insurance carriers to whom the Administration would turn over their proposed national health insurance program.

Secondly, the Administration also failed to inform the Committee that there has been no price control over nursing homes for at least the last two months because of the decision of the District Court in the American Nursing Home Association case, and this has not been followed by any wild increases in nursing home charges.

Thirdly, there is no practical enforcement over the fees charged by doctors and dentists under the control program. No public attention has been focused on any doctor or dentist being fined or jailed for charging excessive fees during the past year. Basically, the Cost of Living Council has no staff to enforce any of the program-however, employers are more than willing enforcers of the wage control part of the control system.

The Administration claims that it desires continuation of controls because of the expectation of additional demand for hospital service following passage of a national health insurance program. However, what they failed to inform the Committee is that 91 percent of all hospital care charges are already paid for by government or private insurance programs. (53 percent paid for by government and 38 percent by private health insurance.) The eight percent paid for by patients directly does not seem likely to lead to a vast increase in demand for hospital services.

The control mechanism did not get at underlying causes of soaring health costs. The Cost of Living Council itself recognized the problems of their old cost control mechanism and instituted instead a whole new mechanism based on projected costs per patient stay. After two years of controls, they scrapped the old price control method for a new method effective in January 1974. This proposal brought court suits from all the various hospital associations and there are substantial questions as to whether this new program deals any better with many of the health care inflationary problems.

A number of other existing programs established by legislation already provide solutions to the inflation in health care. Many provisions of the Social Security Act dealing with Medicare and Medicaid establish price and cost reimbursement restrictions. Other legislative programs were designed to meet special supply problems that have had inflationary impacts upon the health care industry. Most

of these programs were enacted by Congress in opposition to the Administration's short-sighted drive to curtail these health programs because of their budgetary impact. Congress extended the Hill-Burton program, provided aid for community mental health centers, encouraged regional health programs, and authorized grants for medical research and allied health manpower training.

Today, the Hill-Burton Act does not provide funds indiscriminately for new hospital construction, rather new additions require the approval of local, state and federal officials. These funds are now used primarily for out-patient and rehabilitation facilities and public health centers, not for additional in-patient facilities. This emphasis attacks some of the inflationary problems such as the overbuilding of facilities in certain areas.

The Medicaid program already requires comprehensive cost control procedures. As a matter of fact, those regulations require that State plans must make provisions to insure that payments for Medicaid "are not in excess of reasonable charges consistent with efficiency, economy and quality of care." Medicare also restricts payments to "reasonable costs of such services." The government under these programs already carries out a cost control program.

Another program aimed at inappropriate utilization of hospitals and nursing homes is the establishment of Professional Standard Review Organizations (PSRO). These organizations attempt to assure that only those medical care costs are undertaken that are necessary and that the medical care is delivered in the proper setting. This program will do more to cut costs by eliminating uneconomic use of medical services or over-use of certain medical procedures, than any of the programs of the Cost of Living Council.

Medicare and Medicaid's inspection, certification and review process for nursing facilities are designed to prevent needless duplication of staff and procedures and therefore keep costs in line. The latest regulations governing utilization review provides that physicians must evaluate patients on admission to certify that care is necessary and appropriate, and a treatment plan is established for each patient. Independent professional review must be carried out annually to point out sources of waste and inefficiency. Interested parties will now be able to make comparative evaluations as the result of individual contractor performance reviews. State planning agencies will decide on the need for plant and equipment expansion thus eliminating unneeded and uneconomical facilities. The facilities under these programs must establish procedures for medical evaluation studies that identify and examine patterns of care, and review extended duration cases with emphasis on efficiency, appropriateness and especially cost effectiveness of care.

The Health Maintenance Organization legislation passed by Congress at the end of last year provides great promise for reducing medical costs. This type of health care will mean that people will receive comprehensive health care services, rather than the splintering of health care. Such comprehensive programs will tend to mitigate the rise in health care costs.

Earlier, the Administration had withheld funds for medical research and health manpower training. Such cut back in funds certainly were not deflationary but rather inflationary. In this context it seems strange that the Administration should now be singling out the Health industry for continued controls.

A number of states already have detailed cost control mechanisms of their own limiting charges of hospitals and nursing homes. Even the existing Cost of Living Council regulations recognize these state programs. Federal actions by the Cost of Living Council only complicate an already complicated control mechanism, as the District judge acknowledged in the American Nursing Home Association case. The health industry is already over-controlled by numerous government agencies. There is no need for additional control by the Cost of Living Council. The control mechanism of the Economic Stabilization Act does not address itself to the basic supply and utilization problems of the health industry. Rather the control of wages tends to aggravate an already serious low-wage problem for this important industry.

The Service Employees International Union asks that the Committee not extend controls in the health care industry and certainly its already low-paid workers should not be further penalized by any type of wage control.

A STATEMENT SUBMITTED BY THE AMERICAN FEDERATION OF STATE, COUNTY. AND MUNICIPAL EMPLOYEES, AFL-CIO

EXTENSION OF THE ECONOMIC STABILIZATION ACT

The Economic Stabilization Act which expires on April 30 should not be extended. The Nixon Administration has been given 30 months to implement a workable plan to halt inflation. In switching from freezes to phases and back to freezes, one fact has remained evident: the Nixon Administration is unwilling to adopt an even-handed, enforceable controls' apparatus.

The Administration has never made a real effort to control prices, non-wage income, or profits. By disdaining the establishment of a sophisticated enforcement mechanism to curb rising prices, the Administration's version of controls has impacted solely on wages.

The results of such a system which controls labor costs and nothing more have become quite clear over the past year: retail prices up 9.4%, wholesale prices up 20.8%, corporate profits up 27% and real spendable earnings down 2%. American workers, whose income is derived almost exclusively from wages, can no longer abide this inequity.

The Committee has heard Administration spokesmen-particularly Secretary Shultz and Doctor Dunlop—testify against extension of the Economic Stabilization Act past April 30. In place of the authority to extend broad based controls, the Administration requested specific authority to impose controls on the health industry. In his opening remarks on March 7, the distinguished Chairman of this Committee noted that he saw no justification for discriminatory treatment of the health sector. We are in complete agreement with the Chairman in this matter and feel that such discrimination, especially with regard to the wages of the thousands of low income workers in this industry, is both unreasonable and inequitable.

According to Doctor Dunlop, the primary reason for continuing controls in the health industry is related to the methods for financing and reimbursement. Our Union accepts this analysis as an accurate description of the cause of inflation in the health industry. However, we fail to understand the mechanism by which controlling the wages of low income hospital workers has any impact on the problem of financing health care. Congress must not permit the Nixon Administration to place the blame for its unwillingness to deal with the health care crisis in the United States on the backs of hospital workers-whose average salary is barely over $3.00 an hour.

The Administration has requested that the Economic Stabilization Act be permitted to expire. The entire labor movement in this country realizes that any controls program designed by the Nixon Administration will come down hardest against the American worker. Even the business community has begun speaking out against controls.

In summary, neither organized labor, nor business, nor the Administration want controls to continue.

AFSCME urges the Committee and Congress to permit the expiration of the Economic Stabilization Act on April 30, 1974.

STATEMENT OF GEORGE W. KOCH, SUBMITTED ON BEHALF OF THE GROCERY MANUFACTURERS OF AMERICA, INC.

GMA is an association representing the producers of the majority of products sold through grocery stores throughout the United States. It is the main objective of GMA members to provide food and other grocery products for 211 million Americans.

GMA members and American consumers find themselves in the same situationthe prices we both pay spiraled in 1973. We also share with consumers the firm belief that economic controls have been and will be unable to solve this problem.1 GMA members producing processed foods have been under continuous strict economic controls for every minute of every day since the initiation of the Phase I freeze on August 15, 1971 and still food prices have increased to record levels. This clearly demonstrates that economic controls have not stopped the rise of food prices. Not only have prices risen but other, almost as damaging, consequences have occurred.

1 Consumer Research Institute-Opinion Research Corporation Study, "The Public Views the Impact of Government Controls on Food Prices and Shortages."

When wage and price controls were first instituted 29 months ago, GMA supported the Economic Stabilization Program. But at that time we pointed out that, at best, economic controls were effective only as a short run expedient. We believe that the experience of the past two and a half years has proven what we said in 1971, that permanent controls are not in the best interest of the Nation's economy and the American consumer.

Accordingly, in December 1973, the GMA Board of Directors adopted a statement of policy strongly urging that immediate measures be undertaken to terminate mandatory economic controls. We took this position because of our firm belief that the present Economic Stabilization Program has demonstrated that mandatory controls embody costs to the Nation's economy and consumers that are far greater than their supposed benefits.

GMA has identified three major anti-consumer sources of economic dislocations that have been and are generated by these price controls:

One, Creating an ever increasing number of shortages

Two, Placing artificial economic pressures on small firms thus encouraging market concentration and creating unemployment Three, Inviting price increases

ECONOMIC CONTROLS CAUSE SHORTAGES

Controls cause shortages in a number of ways. First, even though there may be buyer demand for a low margin or no margin product, a seller will discontinue the sale of these items at controlled prices if he cannot earn a sufficient rate of return.

Furthermore, when domestic prices are controlled at artificially low levels, a higher uncontrolled world market price will naturally lead to increased exports of agricultural supplies, thereby depriving domestic users of the opportunity to buy these needed commodities. In the absence of the removal of controls, the only solution to this problem is export controls, an action which adds an extremely disruptive element to international trade and our balance of payments. The current shortages in fertilizers, which are an important factor in lowering food prices through increased supply, and plastics, which are used by grocery manufacturers as an efficient material for packaging, may be traced to increased exports as a result of higher uncontrolled international prices. It is also widely agreed that the Phase III1⁄2 freeze aggravated the meat shortage, by deterring the slaughtering of cattle.

A recent extensive survey made by the National Association of Manufacturers demonstrates that if rigid price controls are continued on manufacturing firms, there will be significant reductions in important materials and inputs needed to produce many grocery products, thereby further aggravating the supply of essential food products.2

An added effect is the discouragement of new capital investment which, through increased output and productivity, holds one of the keys to moderating price increases. The rational businessman cannot accept the additional risks involved in making such investments in an uncertain environment, where his price is controlled by the government.

ADVERSE EFFECT ON COMPETITION

A second detrimental result of price controls and probably the most harmful to our free-market economic system, is the adverse effect upon competition, especially competition from small businesses.

The longer controls continue, the more business and labor concentrate on the action of wage/price regulators, rather than the dynamics of the market place. Former FTC Commissioner Dennison has observed that "the longterm hope for America and its economic system lies with free and open competition, with only the absolute minimum of Government interference." "

There is strong evidence that the present Economic Stabilization Program is permanently driving smaller businesses from the market place.

For example, in Phase II, the Price Commission was able to control prices effectively for bread and other baked goods by limiting the prices of the three largest firms in the industry. These firms were precluded from implementing any

2 National Association of Manufacturers, Industry Survey on Wage and Price Controls (Jan. 7, 1974). FTC Commissioner, David S. Dennison, Jr., Phase Out, Address before the Chamber of Commerce Executives, (Oct. 24, 1973).

cost justified price increases because their profit margins would have exceeded the level of their margins during an arbitrarily selected base period. Smaller bakers, on the other hand, with reduced profits, when not constrained by the profit margin test, were permitted to pass on their increased costs under price control regulations. They were, however, in reality, simply unable to raise their prices to recover increased costs because if they did their products would be more costly to consumers than the controlled larger firms, and they would have been chased off the grocery store shelves. As a result, many smaller bakers have been subjected to severe and critical financial hardships, resulting in numerous closings. Clearly, price controls have had the effect of reducing the number of firms in the baking industry, thereby eroding competition.

Phase IV has had a similar impact on smaller firms in the food industry. Under current regulations, large multi-product firms are required to select a single base period for all of their products. These firms, logically, choose a base period designed to maximize revenues of their major product lines. Lesser product lines then reflect an unrealistically low gross margin. These artificial pricing practices have had a devastating financial impact on smaller single line manufacturers which compete with larger firms and their unrealistically low gross margin.

PRICE CONTROLS TEND TO ENCOURAGE PRICE INCREASES

A third major counter productive effect of long term price controls is the incentive over time to raise prices. Because, prices are subject to the whim of Government regulations, there is a strong tendency to implement the maximum increases allowable. If a company which is allowed a price increase under the control program fails to take that increase it runs the risk of being stuck, later on, at a lower price despite increased costs. This is especially true today due to the experience in the transition from Phase I to Phase II, from Phase II to Phase III and Phase III to Phase IV. Similarly, many companies are reluctant to reduce prices or offer temporary special deals or allowances for fear of being stuck with a low "base price" in a future phase of the control program. For instance, in Phase III, it was reported that some firms raised their prices out of fear of being frozen at prevailing lower price levels.

In a controlled economy, the firm that comes out ahead is the one that raises prices as soon as it is permitted to do so. Without the threat of government control of prices, firms will be able to make pricing decisions on the basis of normal competitive factors, and to reduce prices when market conditions so dictate.

The harmful effect of wage/price controls is candidly admitted by the regulators themselves. Former Chairman of the Price Commission C. Jackson Grayson has noted that "by their very design . . . controls interfere with the market system and hasten its move toward a permanent central one." And Dr. Mary Hamilton, a former member of the Price Commission and the Council of Economic Advisors, stated in a recent paper presented to the American Economic Association that "price controls by definition interfere with the normal process of resource allocation through its market mechanism." Also, in récent testimony before the Separation of Powers Subcommittee of the Senate Committee on the Judiciary, the former General Counsel of the Cost of Living Council, William Walker, pointed out that "wage and price controls are, by definition, disruptive and uneven in their impact. Operating in an economy as diverse as ours they are bound to produce countless distortions and anomalies."

The strong economy of this Nation-the ability to find a bargain, to have competition, to find grocery shelves bulging with products-has been the result of a free functioning law of supply and demand. The consumer decides what a product is worth, what is a good buy and what is not.

By letting the Economic Stabilization Act expire, we will return to the law of supply and demand and leave behind the artificiality of Government regulations which can only act to the detriment of consumers.

Moreover, existence of a price monitoring agency as proposed in the Administration bill would be only a half way solution to the problems caused by controls. Such an agency would be subject to continued external pressure to "do something about inflation" and would generate its own interest in extending its authority thereby increasing the risk that controls would be reimposed.

4 C. Jackson Grayson, Jr., Let's Get Back to the Competitive Market System, Harvard Business Review, vol. 51 (1973).

M. T. Hamilton, Price Controls in 1578: Stretegies and Froblemɛ, Faper presented to American Economic Association (December 1973).

William N. Walker, Testimony Before the Separation of Powers Eul com mittce of the Ferate Con.mittee on the Judiciary, (Oct. 10, 1973).