HOW CLOSELY should the D.C. government be regulating the hospitals in the city? There is a brisk debate on this subject just now. The kind of regulation at issue has to do not with the cleanliness of kitchens but with plans among the hospitals to contract and expand. The hospitals want greater freedom to adjust to shifts in demand and costs, install new technologies, alter their services, fend off suburban competitors. But other interested parties -- employers, insurers, consumer groups -- are worried that the hospitals would add choice services, drive up costs and take less care of the poor. The debate is sharpened by the fact that there are also jobs at stake. Hospitals are among the city's largest employers.

The regulatory system at issue was set up by Congress in 1974. Health care costs were rising faster than the cost of living generally, in part because a lot of hospitals had overbuilt. There were too many beds; there was also duplication of technology. The excess capital costs showed up in hospital bills. The legislation set up local health planning bodies all across the country to control future expansion through a system of licensure. Hospitals and other places of care could only expand if they were issued certificates of need.

The hospitals have never liked the system. Their unhappiness increased when Congress in the first Reagan term also introduced a new method of paying them under Medicare. Instead of simply covering most costs, as before, the new method limits their revenues by promulgating fixed rates for most services in advance. The hospitals say that this is discipline enough -- that they now need more freedom to restructure and fine-tune their operations -- and that there is no longer a need for a planning system. Congress is again studying the issue.

Here the dispute led the D.C. government to appoint an advisory panel on health planning. Earlier this month the panel proposed some relaxations of the present rules, but it also proposed continuation and an elevation of the planning process. The mayor should pay attention, it said, not just bureaucrats -- and there should be more monitoring of both the price and availability of care, particularly for the poor. That is not a bad compromise.

The jobs issue or, as the report put it, "the importance of the health care industry to the economic development of the District" cropped up at several points. The D.C. government publication Indices, in listing the largest employers in the city, suggests why. Exclude government and the three largest are George Washington, Howard and Georgetown universities. Next come five businesses: the telephone and electric companies, this newspaper, the Marriott Corp. and Woodward & Lothrop. Of the next eight, six are hospitals -- George Washington, Georgetown, Howard, Children's, Greater Southeast and the Washington Hospital Center. Together they accounted for 13,766 jobs in January of this year. That alone should make health planning matter.