Tort Reform is Needed to Refill the Nation’s Medicine Chest

AFTER EIGHT DECADES IN NEW JERSEY, drugmaker Hoffmann-La Roche recently announced plans to move its headquarters, transferring many high-paying jobs to another state. This is more evidence of a shrinking pharmaceutical industry in the Garden State—once known as“the nation’s medicine chest.”One reason for the exodus is the state’s poor tort liability system.

The recently released U.S. Tort Liability Index: 2008 Report finds that New Jersey’s tort costs for awards, attorney fees, and administrative expenses were $8 billion in 2006, the most recent year for which complete data are available.This gives New Jersey the sixth-highest direct tort costs in the nation.

After controlling for the level of economic activity, New Jersey’s ranking gets worse: it has the second-worst relative tort costs.The state has disproportionately high costs compared to other states of comparable size, especially in the areas of auto, commercial,medical malpractice and product liability.

Companies in New Jersey also face high tort-litigation risks due to a relatively large number of personal injury lawyers filing myriad lawsuits in the state.Things have gotten so bad that New Jersey is now designated a “judicial hellhole” by the American Tort Reform Association. The state’s poor tort climate is causing businesses and jobs to go elsewhere.

According to McKinsey & Co., tort risks are second only to the availability of qualified workers in significance for a company when deciding where to expand operations. In 1990, New Jersey had 20 percent of the nation’s pharmaceutical jobs—the heaviest concentration in the country.Today, it has only 13.7 percent. But there are a lot of tort-reform options that would turn this bad situation around.

According to the Tort Index, New Jersey has weak or no reforms in appeal-bond caps, non-economic-damage caps, class actions, and attorney contingency-fee limits. To that add weakness in attorney-retention sunshine, jury service, asbestos and silica liability, construction liability, junk food and obesity liability, venue rules, and the standard for scientific review of evidence by expert witnesses.

These areas are precisely those that generate disproportionately large-dollar awards and drive up the state’s tort costs.Unfortunately, the New Jersey state legislature has decided not to enact common sense, meaningful tort reform in these areas. Everyone suffers as a result. Every year, excessive tort lawsuits cost each person about $2,000 and increase personal healthcare expenditures roughly eight percent, adding 3.4 millionAmericans to the rolls of the uninsured.We all pay higher prices and higher insurance premiums as a result.Tort reform,in contrast, pays off for everyone.

A University of California-Berkeley economist examined six common tort reforms adopted by states from 1970 through 1997 and found that an additional reform increased employment in manufacturing 1.5 percent, construction 1.4 percent, and 1 percent overall. This translates into 41,000 new jobs for New Jersey if one tort reform were adopted.

The top 10 tort states have a gross state product growth rate that is 25 percent greater than the bottom 10 tort states.Top tort states have higher earnings growth, too, and job growth 57 percent greater than the bottom tort states.New Jersey’s economic growth rate is half the national average.

A good tort system makes a state’s economy more robust and resilient to economic downturns and job losses. If New Jersey lawmakers are serious about attracting and retaining well-paying jobs and innovative businesses, they cannot afford to overlook the state’s massive tort burden. Meaningful tort reform would help restore the state’s long-term economic competitiveness and even refill the nation’s medicine chest.

Lawrence J. McQuillan, Ph.D. (LMcQuillan@pacific research.org) is director of business and economic studies at the Pacific Research Institute in San Francisco. He is coauthor of the institute’s U.S. Tort Liability Index: 2008 Report.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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