Delaware, Walgreen battle over Medicaid dollars

* Walgreen to stop filling Delaware Medicaid prescriptions

* Delaware rescinded half of reimbursement rate cut

* State sued by pharmacy groups seeking to stop action

By Jessica Wohl

CHICAGO, June 26 (Reuters) - Walgreen Co (WAG.N) and Delaware are playing hardball in a battle over cuts in prescription drug reimbursements, a model other cash-strapped states could follow as they try to fill budget shortfalls.

After two months of talks and even an industry lawsuit, Delaware still plans to reduce the amount it reimburses pharmacies for filling Medicaid prescriptions, though by half as much as it previously intended.

Walgreen, Delaware's largest pharmacy with 62 stores, says it would lose money on most branded drug prescriptions it fills for Medicaid patients under the state's new plan. Instead, it will stop accepting Medicaid prescriptions as of July 6.

Earlier this year, the pharmacy chain had threatened to bow out of filling Medicaid prescriptions at 44 Washington state pharmacies in protest against a similar move. It succeeded in getting a smaller cut in the reimbursement rate.

But the two sides remain at loggerheads in Delaware.

"We're disappointed by that decision but they have every right to make it," said Rita Landgraf, the secretary of Delaware Health and Social Services.

One in five people in Delaware, or about 160,000, get Medicaid benefits. That figure is expected to rise as Americans feel the impact of job losses and the recession.

For now, the 100 or so other pharmacies in Delaware are not following Walgreen's lead.

Rite Aid Corp (RAD.N) will still fill Medicaid prescriptions at its 42 Delaware stores. CVS Caremark Corp (CVS.N), which has only one store in Delaware, has not commented on the issue.

"Nobody's happy when you cut back their rate" but some chains are advertising to attract those Medicaid patients who had been going to Walgreen, Landgraf said.

Medicaid provides health insurance to low income people and is jointly funded by states and the federal government.

Delaware has argued that it needs to cut the reimbursement rate as part of its effort to fill an $800-million gap in its budget. If more states follow, other pharmacies could be forced to step up and fight.