Completed in late April 1977, the Carter administration’s proposal offered an approach to hospital cost containment far simpler than either Nixon’s controls or the state-level systems being implemented in Maryland and other states. Carter proposed a limit on hospital revenue growth of about 9 percent annually, based on a formula that combined general inflation levels with an allowance for hospital expenditures linked to quality of care.

Carter proposed a limit on hospital revenue growth

This would be implemented by capping “average reimbursement per admission” for cost payers such as Medicare, Medicaid, and Blue Cross, as well as “average charges per admission” for charge payers such as commercial insurers and self-paying patients. Outpatient care would not be covered by the limits, as the administration hoped to encourage it as a cost-effective alternative to hospital admission. The legislation allowed hospitals to “pass-through” for reimbursement any wage increases granted to nonsupervisory, nonprofessional employees (including nurses and medical technicians). The wage pass-through would potentially exempt as much as $2.5 billion in fiscal year 1980 from the revenue limit. Yet without this concession, Eizenstat explained to the president, labor might oppose the entire cost-containment initiative.

Title II of the bill took up the more complex problem of hospital financing: it imposed an overall, national limit of $2.5 billion on annual hospital capital investment from all sources, to be allocated by regional health systems agencies on the basis of population. This would effectively transform the HSAs from weak regional planning bodies into what National Journal described as “federal regulatory outposts.”

an overall, national limit of $2.5 billion on annual hospital capital investment from all sources

As such, the potential significance of Title II was great. If implemented, it would have significantly strengthened the ineffectual existing federal health care planning program and altered the incentives that pushed hospitals to focus on capital accumulation through revenue-seeking behavior. The Congressional Budget Office estimated that the measure would cut hospital capital spending from $12.2 billion nationally to $4.3 billion in 1981. In addition, it would have authorized regional agencies to ban new beds in areas where planners identified excess supply. Compliance with these measures would be achieved through the federal health care purse: projects not approved by regional planning bodies would lose eligibility for Medicare and Medicaid reimbursement.

Compliance with these measures would be achieved through the federal health care purse

In addition, the federal government would deny loan guarantees, grants, and tax subsidies for added beds in any health service areas with a bed-to-population ratio higher than 4 to 1,000 or with existing occupancy rates lower than 80 percent. These rules would exclude all but 17 of the 205 health service areas in the country. Title II would apply for up to three years, at which point it would be integrated into a more sophisticated permanent cost-control program, presumably based on prospective payment.  If Title II had been implemented, the United States would have developed a far less expensive health care system.

If Title II had been implemented, the United States would have developed a far less expensive health care system

In an April 25 message to Congress, President Carter made his position clear: he emphasized the centrality of hospitals in the rapid rise of health care costs and argued that cost containment represented a necessary preliminary step before the phased introduction of “a workable program of national health insurance.” Without it, Carter warned, the cost of national health insurance would double within just five years, a pattern that “jeopardizes our health goals and our other important social objectives.” In contrast, Carter claimed that the cost-containment bill would deliver $2 billion in overall national savings during fiscal year 1978, with $650 million of that accruing to the federal government alone. Savings would rise to $5.5 billion in 1980. He also took pains to note that the legislation did not reintroduce Nixon’s controversial wage-price controls but instead merely capped overall payment levels.  “I think it is revenue control,” Secretary Califano told the White House press corps. “Hospitals have become, over the years, many of them, quite obese, if you will. They are not trim, and there are many things on which they can save money.”

Carter argued that cost containment represented a necessary preliminary step before national health insurance

When the Senate bill arrived in the House Ways and Means Committee, opponents regrouped and launched an intense lobbying effort against it. Most importantly, Anne Wexler’s coalition-building efforts proved less fruitful in the House, where the more local nature of members’ concerns made them easy marks for the hospitals. As Wexler later explained, “At the grassroots level the opposition was so well organized and so influential that we could never do anything to dent it, and that’s because on every local hospital board was the president of the bank, the president of whatever local community organizations there were, the leading lights in all the religious organizations in town and so forth and so on. We were defeated outside the beltway before we ever got going.” Such voices had direct influence with their representatives, and with limited time and a schedule already jammed with other bills, supporters had few tools to counter such attacks.

'At the grassroots level the opposition was so well organized and so influential that we could never do anything to dent it'

More generally, the cost issue never generated a personal, emotional connection that had the power to shift the issue away from interest-group politics. “We could never make people feel affected by the increase in hospital costs because there was always an intervener, the insurance company,” Wexler observed. “Somebody else was paying the bills and they never felt the pain enough to get excited and exercised about it.”

the cost issue never generated a personal, emotional connection to shift the issue away from interest-group politics

Speaker of the House Tip O’Neill tried to overcome this problem by sharing a hospital bill given to him by a constituent whose son had fallen and smashed his front teeth, an injury that required an overnight hospital stay and generated a bill of more than $2,300—threatening the family with financial ruin. President Carter shared the story in at least one speech. The issue, though, could not be personalized. “It was one of those things where you just couldn’t get the engine going,” recalled congressional liaison staffer William Cable. “There was just no way to get any fire in anybody’s gut for it.”

Excerpted from Hospital City, Health Care Nation, published by University of Pennsylvania Press ©2023