It was more than just an idea. I have an article from the Orlando Sentinel dated Monday, January 15, 1990. It is titled "Walt Disney World in the 1990"s"
It has an actual artist sketch of the planned "Hollywood Horror Hotel it says 2 Hollywood style hotels planned for the late 1990's with 1,000 rooms each, the Hollywood Horror Hotel will include the "Tower of Terror". The hotel in the pictures looks a lot like the current TOT but has an extra wing.
Here is a website that discusses the idea and why it was never built(Scroll half down to find the Q&A:
http://jimhillmedia.com/mb/articles/printer_friendly.php?ID=452
From the website:
Q: I keep hearing and reading that at one point Imagineers actually considered having a legitimate guest resort in or around the Tower of Terror attraction at Disney-MGM Studios. How close did this project actually come to fruition? What kinds of plans were on the drawing boards and what unique ideas would have made this a great resort?
Andrew M.
A:As strange as this may sound, Andrew, it was reportedly Michael Eisner himself who came up with the idea of having WDW guests actually stay inside of the Tower of Tower. (Keep in mind, though, that Eisner was always coming up with somewhat lame-brained concepts for new Disney World resorts. How many of you out there recall when Uncle Michael actually suggested that the Walt Disney Company build a hotel that was shaped like Mickey Mouse? Talk about your cheesy ideas ... Anywho ...)
As I understand it: The way that Eisner allegedly initially envisioned this project (which was then just called the "Haunted Hollywood Hotel" and/or "The Hollywood Horror Hotel" -- way before the whole "Twilight Zone" mythos got folded into the project) was that it would be the most exclusive of the Disney World resorts. The number of rooms that were available for guests to stay in would be extremely limited. Some versions of the proposed hotel's floor plans only showed 10 rooms for WDW guests to stay in. Still other versions of the project (I believe) put the hotel's room count at 50. But never any higher than that.
So what would WDW guests have gotten as part of their high priced stay at this highly themed hotel (FYI: The projected cost of renting rooms at this proposed WDW resort ranged from $500 to $1500 a night)? To put it bluntly, it would have been like you were staying inside the Haunted Mansion.
By that I mean ... ghostly faces were supposed to have appeared in your bathroom mirror. Room service carts -- seemingly pushed along by unseen spirits -- would have wandered through the hotel's corridors. And -- of course -- every trip up and/or down in elevator would have been a thrill unto itself. And let's not forget about that exclusive backdoor access to the Disney-MGM Studios Theme Park that the hotel would have offered its guests.
Sadly, this pretty snazzy sounding project got tripped up by two fairly important factors.
COST: No matter how aggressively Disney's accountanteers massaged the project's numbers and/or bumped up the room count, they couldn't make the "Haunted Hollywood Hotel" / "Hollywood Horror Hotel" financially viable. Given the resort's projected construction costs (what with all the built-in illusions that were supposed to be an essential part of the resort's appeal, initial budget projections put the HHH at costing something in the neighborhood of a $100 million to build. Mind you, this didn't include the $75-$90 million that the Imagineers expected to pour into the construction of the Tower of Terror itself. That initial $100 million was just to cover the resort and its tricked-up hotel rooms), there was just no way that this proposed WDW resort was financially feasible. Even if the hotel was sold out for a solid decade, with guests paying top dollar to occupy ever single room, there was just no way that this proposed resort would ever come close to covering its construction or operations costs.
THE LEGAL ASPECTS: To put it bluntly, Disney's attorneys were scared absolutely sh*tless with the idea that the Walt Disney World Resort might actually go forward with construction of a horror themed, extremely tricked-up, illusion-filled hotel. "What if someone staying at this place were to become so frightened by an illusion that they suddenly keeled over and died?" the lawyers supposedly asked. "The Walt Disney Company could be considered responsible for their death. We could be opening ourselves up to tremendous liability." To counteract this, WDW resort executives reportedly toyed with the idea of having each guest -- as they arrived at the "Haunted Hollywood Hotel" / "Hollywood Horror Hotel" -- sign a waiver stating that they would not hold the Mouse responsible for any scare-related mishaps that might occur during their stay at the resort.
Luckily for Disney's attorneys, Eisner eventually lost enthusiasm for his idea of having guest stay (or -- more importantly -- having guests pay through the nose for the privilege of staying) inside a tricked-up illusion-filled horror-themed hotel. Which is why this concept eventually ended up in WDI's "Discard" pile.
I can see lots of red velvet in the lobby, bellhops in traditional jackets and hats, and Art Deco furnishings in the rooms. I suppose I would be a bit leery of the elevator, though! 
