UPDATE 2-Walgreen in Delaware Medicaid plan, suit continues

* Walgreen stays in program, no longer backs lawsuit

* Delaware wants pharmacy groups to drop lawsuit

* State agreed to small increase in reimbursement rate

* State would reimburse more for some generic drugs (Recasts with comments from Walgreen, industry group)

By Jessica Wohl

CHICAGO, Aug 11 (Reuters) - Two pharmacy industry groups are moving ahead with their lawsuit against Delaware's changes to Medicaid reimbursement rates, with oral arguments set for Wednesday morning, even after Walgreen Co (WAG.N) agreed to stay in the program and said it no longer supports the suit.

On Monday, Walgreen and the state reached an agreement in principle, under which some reimbursement rates would be changed. However, Delaware would not make the deal official until the lawsuit was dropped, and oral arguments were already set for Aug. 12.

The case was filed in June, days after Walgreen threatened to leave Delaware's Medicaid program in protest of the state's plan to slash reimbursements for drugs.

Walgreen, the largest drugstore operator in Delaware, twice delayed its departure from the state's Medicaid program as discussions continued.

The industry says in the lawsuit that the state violated federal law by ignoring the impact the reimbursement cuts would have on patient access to quality care.

The National Association of Chain Drug Stores and the National Community Pharmacists Association, which sued Delaware Governor Jack Markell, the state's department of health and social services and its secretary, Rita Landgraf, each said the groups are still reviewing the issue.

"Our primary concern has always been ensuring pharmacies in Delaware are not being forced to accept financially untenable to cuts to Medicaid reimbursements that would endanger our ability to continue serving Medicaid patients," the National Community Pharmacists Association said in a statement.

WALGREEN STANDS ALONE

Walgreen, which operates more than 60 Delaware stores under the Happy Harry's name, is a member of NACDS. It was the only company to publicly fight against the state's original plan.

Walgreen agreed on Monday, the day before its latest deadline, to accept a new reimbursement rate of 85.5 percent of the average wholesale price, versus the 85 percent the state had agreed to after earlier talks with Walgreen.

Delaware said it should save $250,000 this year with the reimbursement rate at 85.5 percent, down from the $500,000 it expected to save with the rate at 85 percent.