Two health care systems serving adjacent territories across central New Jersey announced Wednesday that they have a letter of intent to merge.(Editor’s note: This report was updated at 1:55 p.m. Wednesday with additional comments from John K. Lloyd and Michael D’Agnes.)



Meridian Health and Raritan Bay Medical Center on Wednesday announced they are planning a merger that would unite two health care systems serving adjacent territories across central New Jersey.



The merger comes at a time when the population health management movement has health systems striving to cast their nets over sufficient territory to achieve positive clinical land financial results. And Raritan Bay, too small to enter the population health realm on its own, gains a large partner with the resources to make it full player in a world being reshaped by health care reform.



Those are among the points made Wednesday by John K. Lloyd, chief executive of Neptune-based Meridian Health and Michael D’Agnes, chief executive of Perth Amboy-based Raritan Bay, as they announced the signing of a letter of intent to merge.



Meridian is among the state’s largest health care systems with about $1.7 billion in annual revenue, 12,000 employees and six hospitals Ocean and Monmouth counties. Raritan Bay has two hospitals, in Perth Amboy and Old Bridge, about $240 million in annual revenue and 1,700 employees.



Hospital contracts with government and commercial payers increasingly are tied to hitting quality and efficiency benchmarks, and some see a future where hospitals and doctors get fixed payments to provide a full spectrum of care, thus taking on financial risk. That paradigm, experts say, requires hospitals to serve a large enough territory to be able to manage the health of an entire population and spread out the risk.



Lloyd said, “Providing more services outside the hospital and better managing and integrating care — that is the direction we want to go in. And candidly, as we take on more risk as providers, which is going to be the way of the future, we need to have a larger geographic area so that we are taking care of a much larger population.”



D’Agnes said, “From our standpoint, we did not have the size or scale to enter into that (population health management) world. We knew that we needed to be part of something bigger, an organization that was far advanced. In the end, we were not large enough. And we will now add additional geography to a very large system.”



Lloyd pointed out that the state’s hospital industry has been on the consolation path for years, to the point that today 75 percent of all hospitals are part of a health system and “that number keeps getting higher.”



He predicted that “you will see more of the health systems in New Jersey expand and grow to better serve their populations via the population health management” model.



Mark Manigan, a health care attorney at Brach Eichler, said, “The transaction is another example of a health system aiming to control a region in order to be in a position to engage in new reimbursement arrangements, whether shared savings or risk based. The thought is if you are dominant in an area it may be easier to identify and manage insured patients in the area.”



Lloyd said he doesn’t have a revenue-size target for Meridian: “Our philosophy and our strategy has been controlled growth and it has to make sense in terms of how you deliver care. At the end of the day the number one priority is to better deliver care and we think we can to it with the model we’ve created in Monmouth and Ocean. It took us quite a long time to create a model which has a full continuum of care: we’ve been at this since the late 80s. We think we have a very robust continuum of care that has proven to be a winner.”



Lloyd said Meridian now provides services in about 100 locations in Monmouth and Ocean.



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“In the future less care is going to be in the hospital and more care is going to be in the community and that is part of the strength of Raritan Bay. This is a great cultural fit and we’re excited about it,” he said.



The deal does not include a payment by Meridian to Raritan Bay. Lloyd said, “They would merge into Meridian, so their asset and liabilities become part of Meridian’s assets and liabilities.”



D’Agnes, according to Lloyd, will join Meridian as president of Raritan Bay Medical Center.



D’Agnes said Raritan Bay first began looking for a merger partner in 2008, but at the time it was coping with losses caused in part by uncompensated charity care and could not reach a deal with a not-for-profit system in New Jersey.



Then in June 2013, Raritan signed a letter of intent to merge with the California-based for-profit Prospect Medical Holdings. But Raritan Bay’s finances continued to improve, so in January 2014, “we terminated our letter of intent with Prospect and began the effort to identify a not-for-profit system,” to merge with, D’Agnes said.



Lloyd and D’Agnes already knew each well, having worked together earlier in their careers. In 1984, while Lloyd was chief executive of Jersey Shore University Medical Center, he hired D’Agnes as chief financial officer. D’Agnes later became chief operating officer before leaving in 1991 to become president of what is now Bayonne Medical Center. He joined Raritan Bay as CEO in 2000.



D’Agnes said, “We remained colleagues over the years as our careers went forward and we always kept in touch. A lot of the things that I’ve done in my career I learned at Jersey Shore working for John.”



That, combined with the geographical proximity of the two systems, “meant that the synergy was perfect.”



Lloyd said in past mergers, Meridian “has a history of coming in and doing whatever we need to do to infuse capital into facilities. Given some of the challenges Mike has had, they have not put as much capital into the facilities as they wanted. We have the wherewithal to do that and we have the wherewithal to get our services out to the community, so we are very excited about this.”



D’Agnes said, “I believe the residents of Perth Amboy and Old Bridge, and the surrounding communities, are going to be able to breathe a sigh of relief that not only will these hospitals continue, but they will be enriched and grow as part of the Meridian system.”



Wednesday’s announcement of a letter of intent to merge now begins several months of due diligence prior to a definitive merger agreement and regulatory review. The period will examine the merger’s financial, clinical and legal issues.



Meridian is in the forefront of a drive to transform health care into a system that incentivizes higher quality care and less wasted spending.



Meridian operates one of New Jersey’s nearly dozen Medicare Accountable Care Organizations, in which doctors and hospitals began partnering with Medicare in 2012 to improve the efficiency of the federal healthcare program for the elderly. Meridian’s ACO is one of only three in New Jersey to achieve savings so far: Last week, Medicare announced the Meridian ACO has saved Medicare $14.89 million and will get a shared savings payment from Medicare of $7.30 million.



Meridian Health is a member of AllSpire Health Partners, an interstate consortium of six health systems that is addressing population health management, best practices and medical research.



Meridian Health is among the largest health care systems in New Jersey, comprising Jersey Shore University Medical Center and K. Hovnanian Children’s Hospital in Neptune; Ocean Medical Center in Brick; Riverview Medical Center in Red Bank; Southern Ocean Medical Center in Manahawkin, and Bayshore Community Hospital in Holmdel. Its Meridian Partner Companies provide home health services, skilled nursing and rehabilitation centers, ambulatory care, ambulance services, fitness and wellness centers, and outpatient centers.



Raritan Bay Medical Center has hospitals in Old Bridge and Perth Amboy and is one of less than 7 percent of hospitals nationally to achieve Magnet Recognition for nursing excellence three times. Raritan Bay is an affiliate Joslin Diabetes Center.



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