This story has been updated to reflect comments from Sen. Majority Leader Bryan Townsend and the Delaware Healthcare Association.
The Delaware Court of Chancery denies the state’s motion to dismiss ChristianaCare’s lawsuit against a newly created board to review and approve hospital budgets.
The case was brought forward in July last year after the General Assembly passed the contentious House Bill 350, creating the Diamond State Hospital Cost Review Board in an effort to curb rising healthcare costs.
The politically appointed board is tasked with annually reviewing hospital budgets to ensure their compliance with the state’s healthcare spending benchmark, a figure the healthcare industry has far surpassed in recent years.
While Vice Chancellor Lori Will dismissed most of the healthcare system’s claims as “unripe,” she is upholding its argument that the Hospital Cost Review Board could violate the Delaware Constitution.
ChristianaCare alleges the statute is a “special act” barred by the constitution because it only affects a subset of hospital corporations.
This refers to a provision in the bill that exempts hospitals that “exclusively provide psychiatric services or rehabilitative services” and those “that serve less than 5% Medicare eligible patients per year or . . . derive 45% or more of [their] revenue from Medicaid or uninsured patients."
ChristianaCare also alleges the legislation conceivably places the Hospital Cost Review Board atop their own boards, usurping the directors’ authority to set its own strategic priorities.
The healthcare system argues that allowing a state-appointed board to override a board of directors requires a two-thirds vote per the Delaware Constitution.
This was a point brought up by House Republicans during the bill's final floor debate, but Democratic House Attorney Karen Lantz disagreed with this legal interpretation at the time.
"It's a regulatory board performing a regulatory function. There are other boards that manage industries that do something — not exactly the same — but similar, and I would also point out that this is not actually even the last step in this process. There is the opportunity to appeal," Lantz said back in May 2024.
The bill only passed with a simple majority in both chambers before being signed into law by former Gov. John Carney.
In a statement, ChristianaCare Chief Strategy & Legal Officer Jennifer Schwartz said she is pleased with the decision.
"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.
With the merits of the arguments still up in the air, the Court of Chancery will next hear oral arguments from both sides of the case.
"The Delaware Healthcare Association took a neutral position on the bill. It was disappointing but not surprising that ChristianaCare then filed a lawsuit in the Court of Chancery. All along, they have resisted any kind of transparency and accountability, even as they purchase multiple out-of-state health systems," Sen. Majority Leader Bryan Townsend (D-Newark) said in a statement.
"Today, the Court dismissed all but one of ChristianaCare’s claims. Required transparency remains in place. As the one remaining claim moves forward, legislators will discuss the best next-steps for Delaware patients and taxpayers. 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."
Although the Delaware Healthcare Association (DHA) eventually took a neutral stance on the bill during the legislative process, DHA President and CEO Brian Frazee has been vocal about his concerns over the board.
“Today’s Court of Chancery 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," Frazee said in a statement.
"Now is the time to put HB 350 behind us and move forward with a better solution for Delaware so we can keep our nationally recognized #1 in hospital quality ranking and build on this progress. Delawareans deserve an all-hands-on-deck collaborative approach especially as we face uncertainty on the national level and the likelihood of deep cuts to healthcare programs. We continue to stand ready to partner with the state and our healthcare partners on an approach that ensures an affordable, accessible, and quality healthcare system for all Delawareans.”
The board has already held its first three meetings, but it is not expected to begin reviewing hospital budgets until 2026.
