GIDDINGS (AP) – Pharmacist J.D. Fain loves small-town life and his apothecary shop just off the main highway. He sponsors a Little League baseball team and gives his neighbors advice on their prescription drugs, even if they do sometimes choose to fill them at the Wal-Mart down the street.

Fain bought Pieratt’s Pharmacy 14 years ago, moved it to a new building and kept the 50-year-old business’ motto: “Your Hometown Pharmacy.” Fain greets customers by name, knows their family, their medical histories and most importantly what drugs they’re taking for their ailments. He figures about 12,000 people live in the Giddings area, and he fills roughly 250 prescriptions a day.

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How much longer he can stay in business, though, is questionable. A new state law reduces by 80 percent how much pharmacies get reimbursed for filling prescriptions for customers who rely on Medicaid, the government-funded insurance that serves about 3.3 million poor and disabled Texans.

The new Medicaid prescription drug program is expected to save up to $100 million over the next two years by hiring private companies, called pharmacy benefit managers, to pay out the lower rates and negotiate the cheapest possible drug prices.

Opponents say it will make small pharmacies like Fain’s go the way of the neighborhood grocer, the local bookshop and the corner music store, and replace them with big-chain stores and online pharmacies, some owned by these same pharmacy benefit managers.

The law, which took effect Thursday, will cut the reimbursement rate Fain receives for filling a prescription to about the same level benefit managers at private insurance companies and Medicare pay. But with experts estimating the true cost of filling a prescription — not counting the cost of the drug — at between $8 and $11, the reduction of the reimbursement rate to $1.35 destroys the business plan used by many small, independent pharmacies.

“This is really the last straw,” said Fain, sitting in a break room and dressed in navy blue scrubs. “The reasonable payers are now going to these unreasonable plans.”

Medicaid is one of the state’s largest and fastest-growing expenses and is expected to add $15 billion to the budget in 2013. State lawmakers are desperate to get that spending under control.

“If you don’t reform the system, improve the system and get the waste out of the system, then you’ll have to start changing the eligibility rules and people who need help aren’t going to get it,” said Mark Merritt, president of the Pharmaceutical Care Management Association, insisting that tougher competition will improve the market. “What patients will find is they get better service, and what taxpayers will find is that they are spending less money.”

Independent pharmacists say, however, that they aren’t getting a fair shake. Six national pharmacy benefit managers will now handle the reimbursement process in Texas. These companies also operate mail-order pharmacies, or in the case of CVS-Caremark, operate a chain of retail stores.

State law prohibits the companies from requiring patients to use mail-order pharmacies, but the more money the management companies save, the more they make because they are allowed to keep the savings, up to a certain level. So these companies will likely encourage Medicaid patients to use their services, rather than local pharmacies.

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Stephanie Goodman, the spokeswoman for the Texas Department of Health and Human Services, said state law requires the management companies to recruit enough pharmacies to make sure all patients have access to a drug store within 15 miles of their home, and a 24-hour pharmacy within 70 miles. She said that based on reports so far, customers will have plenty of options. After that, she said, market forces take over.

Merritt agreed that most independent stores will join the new system, even if that means losing money on some prescriptions. But he said there is value in getting customers into the stores because they will often buy more profitable items, such as toothbrushes or soap.

Drug store chains and grocery stores that include a pharmacy have an advantage over the mom-and-pop stores because they sell thousands of products besides prescriptions. Small pharmacies rely on drugs for a larger proportion of their business, and can’t absorb losses on reimbursements the same way bigger companies can.

The new system “will require an adjustment in their business model, but I think that is true of anybody in these economic times,” Merritt said of the independent businesses.

Fain operates one of three pharmacies in Giddings, about 55 miles east of Austin. The other two are inside Wal-Mart and Brookshire Brothers grocery stores. Unlike his competitors, he only sells drugs and medical supplies. He says it is hard enough as a small businessman to manage the $300,000 worth of drugs that he keeps in stock without having to add gifts, candy and a dozen brands of shampoo to his inventory.

Fain said he prefers to focus on providing his patients with the advice they need to stay healthy.

Trade groups representing independent pharmacies have tried to block the new law in court, but with little success so far. They also commissioned a study that predicted 1,300 stores will likely shut down across the state and 36,000 workers will lose their jobs because of the new rules.

Fain doesn’t plan to be one of them. He said he’s looking into joining a chain or opening a second store.

“The more drugs you buy, the cheaper you can get them,” he said. “It helps some, but it doesn’t last forever, especially when they keep decreasing your reimbursements.”

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