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Thinking Economically: Tort Reform Strengthens the Texas Model

Musings on Economic Freedom from the Texas Public Policy Foundation’s Center for Economic Freedom

One of the complaints from the left about Texas’ government policies is that in “most states, government financing rests on a three-legged stool — property tax, sales tax, and income tax. In Texas, the stool has only two legs.” The result, they say, is “a system of income redistribution that takes from the poor and gives to the rich.”

The problem with this complaint is that it ignores the fact that prosperity for rich and poor alike comes not from the distribution of income by the government but from the increase in societal wealth derived from an unencumbered and thus productive private sector.

To help explain this fundamental economic concept to policymakers, the public, and the media, the Foundation recently launched a new section on its website, The Texas Model. We define the Texas Model as a mixture of low spending and taxes, a predictable, low level of regulation, and a sound civil justice system combined with minimal dependence on/interference from the federal government. So rather than being based on a shaky three-legged stool designed to take money out of the economy, Texas’ amazing economic success over the last decade has a solid foundation based on these four principles with the goal of leaving money in the economy.

We’ll discuss more about the Texas Model next week, but this week want to focus on the foundational element of tort reform and the part it has played in boosting the Texas economy.

Our recent paper, The Texas Model: Improving Health Care through Tort Reform, details the great benefits Texans have received from tort reforms enacted in 2003:

Prior to 2003, the State of Texas was in a medical crisis. Doctors were being sued at record pace and for record sums as there was no cap on non-economic damage awards. This caused malpractice rates to rise significantly. … As a result, many doctors were choosing not to practice in Texas. In 1998, there were 2,866 newly-licensed physicians in the state. By 2002, that number dropped to 2,110, even as the general population in Texas was expanding. By 2003, Texas ranked 49th out of the 50 states in doctor-per-citizen ratio.

In June of 2003, the Texas Legislature passed a comprehensive package of medical liability reforms to fix the medical care crisis in the state. It worked. Since then, Texas has seen a remarkable medical turnaround. There have been 24,583 new physicians licensed in Texas. The Texas Medical Board (TMB) has received 83 percent more applications and licensed 60 percent more doctors in the past four years than in the four years preceding reform. Today, Texas has more physicians per capita than ever before.

These benefits were also shown in a great New York Post commentary by Center for Economic Freedom Senior Fellow Joe Nixon, who authored the 2003 reforms.

Why did these reforms work? They worked because they helped restore our civil justice system to its original purpose, which is to compensate people harmed by others who behave badly in the marketplace.

What had happened in the years leading up to 2003 was that the system had been hijacked to become a source of income to plaintiffs and their attorneys regardless of whether anyone had been harmed. The result was the same thing that happens whenever there is excessive government interference in the market—the market stopped working efficiently. Doctors left, many patients didn’t have access to prompt medical care, and those that did had to pay more for it. Today, this has been reversed, thanks to the medical reforms of 2003.

In addition to the medical reforms, Texas has enacted many other civil justice reforms in the last decade that have gone a long way toward eliminating the plaintiff-driven “system of income redistribution” that had caused great harm to the Texas economy. An accounting of many of these reforms is contained in our 2008 paper, A History of Lawsuit Reform in Texas. Additionally, our paper, Returning Justice to the Judicial System, shows why Texas needed to enact more reforms this past session—such as “loser pays,”—to keep the Texas Model on a firm foundation.