The retail pharmacy industry is taking the Bush administration to court over a regulation cutting the amount Medicaid pays for prescription drugs.

The National Association of Chain Drug Stores (NACDS) and the National Community Pharmacists Association (NCPA), sometimes rivals on Capitol Hill, filed their joint lawsuit Wednesday in a federal court in the District of Columbia, alleging that the new rates violate Medicaid law.

These two groups are often at odds on legislative issues. Although the NACDS represents many of the small pharmacies that make up the NCPA, its membership also includes large retailers like CVS and Walgreens, which depend less on prescription drug sales for their revenue because they sell a wide variety of other products. Smaller drugstores, by contrast, generally focus on medicine sales.

The Medicaid drug pricing issue, however, has united the two segments of the drugstore lobby.

“This is an issue that really has galvanized the pharmacy industry to work together,” said Bruce Roberts, NCPA’s executive vice president and chief executive. NACDS President and Chief Executive Stephen Anderson used nearly identical language during a joint conference call with reporters on Wednesday.

The legal action is the latest salvo in the pharmacy lobby’s efforts to preserve payment levels for prescription drugs, especially generic medicines, in recent years. The NACDS and the NCPA also say they will intensify their lobbying efforts to get Congress to step in and make their lawsuit unnecessary.

The suit names the Department of Health and Human Services (HHS), the Centers for Medicare and Medicaid Services (CMS) and their respective chief officials, HHS Secretary Mike Leavitt and acting CMS Administrator Kerry Weems.

A CMS spokesman defended the policy, saying that the agency has carried out Congress’s intent to more appropriately pay pharmacies for prescription drugs.

Roberts and Anderson insisted they prefer congressional relief to pressing the issue through the courts. “We are pursuing a two-pronged approach on this issue,” Anderson said. “The real solution to this problem is legislative action,” Roberts said.

Beginning in January, CMS will begin paying a lower reimbursement rate to pharmacies for certain medications under legislation passed in 2005. According to the drugstore groups, which opposed that bill, CMS’s actions go beyond congressional intent.

“There are literally dozens of legal violations in this rule that we are challenging,” NACDS General Counsel Don Bell charged.

“CMS believes that the new [payment] regulation is fully consistent with the [Deficit Reduction Act] and other relevant provisions of the Social Security Act and thereby implements Congress’s desire to make Medicaid prescription drug payments more efficient and economical,” CMS spokesman Jeff Nelligan wrote in an e-mail.

Citing figures used by CMS, the Government Accountability Office and the HHS Office of Inspector General, respectively, the pharmacy associations say the pending regulation would reduce Medicaid payments to druggists by $8 billion over five years; set reimbursement rates an average of 36 percent below actual costs for 77 common medicines; and pay less than cost for 19 of 25 common medicines.

The pharmacy groups claim that these payment reductions will force some small community drugstores to cut back on services or even go out of business altogether. The lobbying organizations also emphasize that these small drugstores often provide services in remote areas where large retail pharmacies do not have a presence.

The first stage in the NACDS-NCPA legal fight against HHS will be to request a preliminary injunction from the court against the regulation, which would take effect on Jan. 1, 2008. According to Rector, the injunction is needed to prevent HHS from delaying its response to the lawsuit until after Medicaid begins paying the lower rates.

The drugstore lobby fought unsuccessfully against the original provisions and has tried to fend off the regulation since Congress enacted the Deficit Reduction Act in 2005.

The NACDS and the NCPA have attracted powerful allies, but they have not achieved success in repealing or scaling back the underlying provisions of the 2005 law.

However, they may yet see relief from the Hill. Senate Finance Committee Chairman Max Baucus (D-Mont.) and Rep. Frank Pallone Jr. (D-N.J.), chairman of the Energy and Commerce Committee’s Health Subcommittee, have introduced identical legislation that would modify the regulation. Rep. Nancy Boyda (D-Kan.) has introduced her own bill, which has more co-sponsors than Pallone’s.

The two pharmacy groups advised lawmakers of their lawsuit in letters sent Wednesday to Finance and Energy and Commerce committee members and to the co-sponsors of the Boyda, Baucus and Pallone measures.

“We wanted to be in touch with you immediately to emphasize an important point: this lawsuit was necessary at this time given the impending crisis on January 2008 [sic], but legislative action this year remains necessary to sufficiently remedy this problem,” Roberts and Anderson wrote.

As required by  the 2005 law, the regulation recalculates the basis for what Medicaid pays for “multiple source” drugs, which are made by more than one manufacturer and generally include generics. Medicaid pays a rate called “Average Manufacturer Price,” which CMS has redefined in a way that the drugstores maintain is too broad and violates earlier statutes. They also charge that CMS is motivated by a desire to cut spending rather than to achieve a policy objective.

CMS published a draft version of the regulation in December 2006 and issued the final rule in July 2007. Boyda, Baucus and Pallone each introduced their bills after the publication of the final regulation.