In-patient hospital costs have grown at an annual rate of 15 percent for the last fifteen years, and the cumulative impact of these increases has created tremendous political pressure to contain this growth. Yet despite numerous attempts to pinpoint the causes of this inflation-and nearly as many recommended policy approaches-the outlines of an effective cost containment program still elude us. Previous approaches to cost containment have tended to emphasize the mechanics of how hospital costs are incurred rather than seeking to explain the underlying causal factors that generate these costs. This analytic focus appears to reflect the lack of a political theory of the hospital which can comprehend the unique character of the hospital's internal decision-making process. One suitable basis for such a theory is Crozier's model of a "conflictive equilibrium." In this model, the hospital's decision-making authority is lodged in a complex power relationship which reflects the respective intra- and extra- institutional resources of its occupational groups, and particularly of physicians and administrators. This analysis of hospital behavior can both explain the hospital's reaction to present cost containment program as well as predict its response to other likely policy approaches. It also may enable us to begin to design more effective programs through which to control the financial consequences of hospital decisions.