(Updates throughout with comments from Delaware's Health and Social Services.)

 
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Walgreen Co. (WAG) said it had made significant concessions in talks with the state of Delaware's about its planned reimbursement cuts and warned the state's proposal would cause more significant disruptions to Medicaid patients than its officials expect.

"Cutting reimbursement rates to pharmacies isn't in the best interests of patients, pharmacies or the state when that leads to less access for patients and higher costs," said Walgreen senior vice president Kermit Crawford.

The company added it previously agreed to accept nearly two-thirds of the rate cut proposed by the state.

Rita Landgraf, secretary of Delaware's Department of Health and Social Services, said the state had unsuccessfully tried to negotiate with Walgreen in May, and presented a reimbursement rate that represented a 50% reduction from its planned rate cut. Landgraf said the company verbally said it couldn't accept the negotiated rate.

Walgreen said the state's current proposal would result in the company losing money on 84% of the brand-name prescriptions it fills for the Delaware Medicaid program.

Earlier this month, the nation's largest drugstore chain by sales said new state rules involving Medicaid reimbursement that are scheduled to become part of the state's new budget on July 1 would reduce the price for brand-name medications, making it uneconomical for pharmacies to continue to fill the prescriptions.

The state, meanwhile, responded by saying businesses needed to help share in the burden of the recession. On Wednesday, Crawford said Delaware was "attempting to place unfair budget burdens on the backs of pharmacies."

"The state is turning a blind eye to the disruption its rate cut will cause to those who are in most need of assistance," Crawford added.

As a result of the planned changes, Walgreen said it would pull all of its Happy Harry's pharmacies from the program as of July 6. Walgreen, which acquired the Happy Harry's pharmacies in 2006, is the largest pharmacy provider in Delaware.

The company maintained it believed the state would realize savings by improving generic dispensing throughout its entire pharmacy network.

For example, Walgreen said it fills 69% of Medicaid prescriptions with generics, while all other pharmacies in the state fill 63% with generics. It said that each percentage point amounts to $1.2 million in potential savings, and said Delaware could save more than $7 million a year by bringing other providers up to Happy Harry's and Walgreen's level.

Delaware spokeswoman Landgraf said Walgreen at one point said savings of $10 million could be achieved through other means, but said the company wouldn't detail any specifics about how those savings could be achieved.

"My guess is that they don't believe we expense generics at the rate in which we could, but our total rate for generics through the Medicaid program is 89%," Landgraf said. She added that rate was regardless of what pharmacies within Delaware are dispensing.

"We are mandated by the Medicaid program to use generics and the only time Delaware uses the brand name is when a doctor provides the state with medical evidence as to why they believe strongly that a brand should be used over a generic," Landgraf said.

Landgraf said the state was disappointed it couldn't reach a partnership agreement with Walgreen, adding it "didn't foresee negotiations going forward at this point." Delaware is already in the process of looking at other locations to get prescriptions filled at other pharmacies, and Landgraf said the state was "confident there is adequate access."

Rite Aid Corp. (RAD) is the second-largest pharmacy provider in the state, with CVS Caremark Corp. (CVS) and Wal-Mart Stores Inc. (WMT) having a large presence as well.

Shares of Walgreen were inactive in after-hours trading, after closing up 1.2% to $30.

-By John Kell, Dow Jones Newswires; 201-938-5285; john.kell@dowjones.com