Chancery Court gives greenlight to lawsuit against hospital budget oversight board

The one and only count a Chancery Court judge has allowed to continue in ChristianaCare’s lawsuit against a newly created state board to oversee hospital budgets questions the simple majority used when the General Assembly passed the bill. 

In an opinion released May 30, Vice Chancellor Lori Will ruled that only one of the eight counts brought by ChristianaCare against state proponents of the law can move forward in court. The other counts are mostly “unripe challenges” because the Diamond State Hospital Cost Review Board created to oversee the hospital’s budget is not fully empaneled. As it stands, budget rules or regulations have not been created or implemented, and the effects of any future implementation is yet unknown.

Will dismissed ChristianaCare’s claim on equal protection grounds over price caps with prejudice, because she said ChristianaCare is already subject to them. 

The one count with which the hospital can proceed pertains to passage of House Bill 350 in 2024 by a 14-7 vote in the Senate and by 24-16 with one absent in the House. The bill was signed by then-Gov. John Carney three weeks later.

Healthcare systems and hospitals including ChristianaCare, Bayhealth and Beebe Healthcare opposed the bill throughout the legislative approval process. ChristianaCare filed suit in July 2024.

In her opinion, Chancellor Will writes a corporate charter serves as a contract between the State of Delaware and the entity, which includes the corporation’s officers, directors and stockholders.

Under Delaware’s general corporation law, Will said the state Legislature has the right to change a charter through an amendment to the law, but “given the implicit power that this provision gives the state over corporate charters, Article IX of the Delaware Constitution acts as a guardrail by requiring supermajority approval of any amendment.”

This includes overriding budget decisions normally made by a corporate board.

“Delaware courts have held that the supermajority voting requirement in Article IX must be adhered to if legislation amends a corporate charter ‘by necessary implication,’ even if it lacks ‘any express reference’ to the charter or the [general corporation law],” Will writes.

Other counts against the state could be filed later once regulations are promulgated and ChristianaCare or other hospitals can prove those rules are affecting them adversely, according to the opinion.

Following the release of the court opinion, Senate Majority Leader Sen. Bryan Townsend, D-Glasgow, said legislators will discuss the next steps as the lawsuit moves forward. Financial transparency and accountability are critically important, he said in a statement, noting ChristianaCare has resisted while purchasing out-of-state health systems.

“We remain optimistic that mandating transparency will lead to more responsible, sustainable budgeting and governance by Delaware’s hospitals, and better, more affordable outcomes for all the Delawareans they are supposed to serve,” Townsend said.

The ChristianaCare and the Delaware Healthcare Association celebrated the court’s decision.

ChristianaCare’s lawsuit against the state is necessary to preserve independence in clinical decision-making, protect critically necessary hospital services and resources, ensure nonprofit board autonomy and sustain a strong health care delivery system in this community for generations to come, said ChristianaCare Chief Strategy & Legal Officer Jennifer Schwartz in a press release.

“As we have said from the beginning, House Bill 350 raises important questions about the integrity of the corporate franchise in Delaware, and whether it is legal for the government to usurp authority over core business decisions, such as setting the budget and strategy, from a corporation’s duly elected board. As the Court of Chancery stated in its decision, it is a ‘bedrock’ principle of Delaware law that the business and affairs of a corporation are managed by and under the direction of its board,” Schwartz said.

Delaware Healthcare Association President and CEO Brian Frazee said the court decision recognizes the stark difference between oversight and overreach.

“House Bill 350, which created the Diamond State Hospital Cost Review Board, was inspired by a failing Vermont model that is clearly not the right solution to Delaware’s unique healthcare challenges. As we’ve said all along, the law authorizes a state-run board to step into local hospitals’ private governance to control their hospital budgets. Today’s opinion shows that this law raises significant constitutional questions,” he said in a press release.

Kyle Benoit, vice president and chief operating officer of Bayhealth, said the state does not need government oversight. 

“We feel like all the health care agencies in Delaware do a great job,” he said. “We do a good job and don’t need a government oversight board to run our operations.”