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* Delaware rescinded half of reimbursement rate cut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.

"The larger share operators in any state are going to have the most to lose, so they're going to be the most vocal" and in Delaware, that is Walgreen, said Pali Capital analyst Robert Summers. "I don't think that we can necessarily exclude these kind of issues materializing for Rite Aid or for CVS."

Rite Aid, while still filling Medicaid prescription, is concerned about the economic hit the move could make.

"When you serve a lot of Medicaid patients, they take a lot more time to serve, too, because they are generally patients that have more healthcare issues and whatnot," Rite Aid Chairman and CEO Mary Sammons said during a June 24 conference call. "So the whole reimbursement there becomes part of making it profitable to serve those patients or not serve them. So I think Medicaid reimbursement is an issue."

Delaware cut its reimbursement level to 84 percent from 86 percent of the average wholesale price back in April. After discussions with Walgreen, Delaware agreed to cut only to 85 percent as of July 1. The state stands to save $500,000 in its next fiscal year, versus the $1 million it had originally hoped for, Landgraf said.

Walgreen does not agree with a cut, even the smaller one.

"It wouldn't be a sound business decision for us to take a loss on any portion of our business. We're a pharmacy, and pharmacy is not a loss-leader for Walgreens," said spokeswoman Tiffani Washington.

After talks stalled, two pharmacy industry groups sued Delaware Governor Jack Markell, Landgraf's department and Landgraf herself in early June.

The industry claims that the state violated federal law by ignoring the impact the reimbursement cuts will have on patient access to quality care. They also want the rate cuts halted while a judge considers the suit.

There currently are no plans to take this kind of legal action in other states, according to National Association of Chain Drug Stores spokeswoman Chrissy Kopple. Her group, which represents drugstores, grocers and mass merchants with pharmacies, is a plaintiff in the Delaware suit and was a plaintiff in Washington state. (Reporting by Jessica Wohl; Editing by Tim Dobbyn)