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This book contains the edited proceedings of a conference sponsored by the Center for Health Policy Research at AEI in July 1974. The conference--which brought together experts from the government, industry, and the academic community--examined how the public's interest in health care is affected by the performance of the drug industry and government policy.

Part I deals with the consumer's interest in pharmaceuticals. Kenneth Melmon reviews some of what we know about drug risks and benefits, concluding that more data are needed before we can separate fact from fancy. Sam Peltzman measures the benefits of more rapid diffusion of drug information and finds that these benefits might be quite large. Mitchell Balter looks at how consumers cope with illness and sees a need for more study of the benefits and risks of drug therapy from the vantage point of the consumer.

Part II considers drug company profitability. Thomas Stauffer tests a financial model with pharmaceutical industry data to show that accounting rates of return have an upward bias that produces serious overstatement of the economic rates of return for discovery-incentive industries such as pharmaceuticals. Robert Ayanian's model, which treats advertising and R&D expenditures as capitalized investment, shows that accounting rates of return for six pharmaceutical firms not unusually high compared to other industries. David Schwartzman, finding that the expected rate of return from drug R&D declined from 11.3 percent in 1960 to 3.3 percent in 1972, considers the causes and probable outcomes of this decline.

Part III offers new evidence on the effects of government policy on drug innovation. Harold Clymer presents data on trends in domestic and foreign drug research to show that the U.S. regulatory climte has induced research-intensive drug firms to divert more of their research efforts to other countries. Louis Lasagna and William Wardell, summarizing their study on the research output of fifteen U.S. firms, show that since 1962 new drugs approved by the FDA have represented a very small percentage of the large, but declining, number of drugs submitted for approval. They propose a redefinition of the FDA's role to place more emphasis on the benefits of drugs in improving the treatment of illness. In a separate paper, William Wardell surveys the effects of changes in U.S. and UK regulatory policy on various therapeutic categories of drugs.

Part IV considers the structure and behavior of the drug industry. Lester Tesler test theories of market entry and finds that prices tend to fall in response to entry and that advertising effort is a means of entry. Douglas Cocks, using a different database, finds that drug prices decline in response to the industry's competitive R&D process. Bernard Kemp, focusing on the example of diuretic drugs, gives a detailed account of how drug companies compete through the innovative process.

Robert B. Helms is a resident scholar at AEI.