UPDATE 2-Walgreen exiting Delaware Medicaid program

* Walgreen leaving Delaware's Medicaid program in July

* Says Delaware reducing payments on brand name drugs

* Move follows similar step drugstore took in Washington (Adds CVS, Delaware dept of health and social responses)

By Jessica Wohl

CHICAGO, June 4 (Reuters) - Walgreen Co (WAG.N) said on Thursday it would no longer fill Medicaid prescriptions at its Delaware pharmacies starting next month in protest against the state's plan to slash reimbursements for drugs.

Walgreen argues that under a new reimbursement rule set to be part of the new fiscal budget starting in July, Delaware will cut the price it will pay for brand name medications, which would put pressure on pharmacies.

"Quite simply, we can't continue to participate in a program that, in some cases, pays us less than our cost to fill these prescriptions," Kermit Crawford, the company's senior vice president of pharmacy, said in a statement.

Walgreen said it would stop filling Medicaid prescriptions in all 66 of its Happy Harry's locations as of July 6. Walgreen entered Delaware in 2006 when it bought the Happy Harry's chain, and is the largest pharmacy provider in the state.

Walgreen is turning its back on Delaware's neediest citizens, said Rita Landgraf, cabinet secretary for the state's department of health and social services. She said the reimbursement cuts would have helped offset a small portion of the $800 million budget shortfall Delaware faces. The state offered some attempts at a compromise which Walgreen publicly rejected with its statement, she said.

Landgraf said she is still open to having discussions with Walgreen. The state is looking for alternatives for its 157,000 residents on Medicare to be able to get their prescriptions filled. Delaware has 104 pharmacies besides those owned by Walgreen, she said.

Walgreen said that along with the National Association of Chain Drug Stores it suggested alternatives to the state that could help it fill its Medicaid budget gap.

Walgreen operates more pharmacies in Delaware than rivals Rite Aid Corp (RAD.N) and CVS Caremark Corp (CVS.N). Rite Aid said it has no plans to stop filling Medicaid prescriptions at it 42 stores in Delaware. CVS declined to comment.

Walgreen's decision to stop filling Medicaid prescriptions in Delaware follows a similar move it took at almost half of its Washington state pharmacies. [ID:nN30536970] (Reporting by Jessica Wohl; Editing by Richard Chang and Lincoln Feast)