Rite Aid Corp.'s central role in Pennsylvania's Medicaid managed-care experiment is coming under increasing criticism and scrutiny, even as that role continues to grow.

The Camp Hill, Pa., company's dual position in the Medicaid program - as a large retail pharmacy chain and as the subcontractor that has set low reimbursement rates to pharmacies - represents a conflict of interest, say competing pharmacists and advocates for Medicaid recipients.

Funded by federal and state money, the Medicaid HealthChoices program covers nearly 500,000 people in southeastern Pennsylvania and is expected to expand across the state. The state Department of Public Welfare awarded contracts to four Medicaid HMOs, which receive set fees to cover the health needs of each member. In turn, each HMO pays a portion of the state money to a subcontractor to administer pharmacy benefits.

When a Medicaid HMO member presents a prescription to a pharmacy - whether an independent or a chain such as Rite Aid - the subcontractor reimburses the pharmacy for supplying that medication.

Since January 1997, Keystone Mercy Health Plan, a Medicaid HMO with 240,000 members in the Philadelphia area, has subcontracted with Eagle Managed Care, a Rite Aid subsidiary, as its pharmacy administrator.

In May, Keystone Mercy and Eagle decided to reduce reimbursement rates for brand-name and generic drugs. It was this decision that stirred the current wave of criticism.

The Rite Aid competitors say the company has taken unfair advantage of Eagle's role by setting the amount it pays other pharmacies so low that they cannot afford to fill prescriptions. The low reimbursements don't affect Rite Aid the same way, its competitors say, because whatever Keystone Mercy money that Eagle doesn't pay out in reimbursements is profit.

The cuts have driven hundreds of pharmacies to quit filling many Medicaid prescriptions. Advocates say the result is that poor people, many of them disabled, must travel farther to get prescriptions and have fewer choices of where to have them filled.

Their concerns have drawn the attention of legislators and other state officials. This month, Auditor General Robert P. Casey Jr. began an audit of Keystone Mercy that he said would focus on its prescription-drug program.

Some in the industry say they have also spoken to investigators from the Federal Trade Commission and the state Attorney General's Office, though neither agency will say whether it has begun a formal investigation.

Officials at Rite Aid and the Department of Public Welfare, joined by spokesmen for the managed-care plans, say the complaints are off-target. They say the HMOs are doing their best with limited resources to serve the area's poor.

Rite Aid officials say they earn little from the state money they receive for Medicaid patients' prescriptions, because payments passed on by the HMOs have not kept pace with rising drug prices.

Rite Aid vice president Suzanne Mead said pharmacies demanding better reimbursement were asking the state's taxpayers to subsidize them.

``In essence, what they're seeking is that the government should appropriate more taxpayer money to make their businesses more profitable,'' Mead said. She said it was ``important to note . . . that Rite Aid Corp. has decided to serve the medically indigent in the Philadelphia area while many, many others have not.''

Patient advocates, for their part, bristle at the portrayal of Rite Aid as a protector of the poor.

Said Ronda B. Goldfein, senior staff attorney at the AIDS Law Project of Pennsylvania: ``There's something inherently wrong when a company is allowed to start a crisis through their subsidiary and then they stand up as the good guys because they're willing to fill the prescriptions.''

Pharmacists have long complained that HMOs and other insurers push for rock-bottom prices on prescription drugs to hold their own costs down. Last year, Aetna U.S. Health Care and Independence Blue Cross imposed cuts that brought threats from several major chains, including Rite Aid, that they would refuse the plans' prescriptions. Rite Aid, CVS and Eckerd eventually said they had renegotiated their rates with the insurers, though the new rates were not disclosed.

The Keystone Mercy-Eagle cuts in May were even deeper than those that the chains balked at last year. CVS, Eckerd and independent pharmacists then said proposed reimbursements were so low that they would lose money by filling prescriptions for plan members. CVS and Eckerd dropped out, refusing to fill any prescriptions for Keystone-Mercy members.

Eagle's cuts affect more than Keystone Mercy's 240,000 members.

Earlier this month, Healthcare Management Alternatives (HMA), a second Medicaid managed-care plan that also subcontracts with Eagle, announced similar reimbursement cuts in the prescription-drug plan for its 75,000 members. CVS and Eckerd announced that they were quitting HMA too.

``We are extremely concerned for the Medical Assistance recipients affected by this change,'' said CVS spokesman Fred McGrail, who said the chain had been forced to drop both plans ``solely due to the inappropriate level of reimbursement.''

And the shoe is about to drop for members of a third plan, Health Partners, which is shifting pharmacy benefits for its 120,000 members to Eagle starting on Tuesday.

Eric S. Elliott, Eagle's chief executive officer, said that Keystone Mercy members throughout the plan's eight-county network lost access to about 500 of the 1,200 pharmacies that formerly took their prescriptions. When asked whether pharmacists could afford to do business under the new reimbursements, he said: ``I don't know their cost structures, but certainly 700 of the 1,200 decided that they could.''

Patricia S. Jacobs, the Welfare Department's managed-care operations chief, said the remaining pharmacies were enough to meet the state's standard that every patient in an urban area have a choice of at least two pharmacies within 30 minutes' travel by public transit.

``Every indication we have is that there are sufficient pharmacies in the Eagle Managed Care network to service our clients adequately,'' she said.

Jacobs said it made no difference to the state if both those pharmacies were Rite Aids. ``We do not distinguish who owns the facility,'' she said. ``. . . We don't get into that. That's not something we can do.''

Jay Pagni, a Welfare Department spokesman, downplayed the criticism of Eagle's pharmacy benefits. For most patients, he said, the only difficulty was finding another nearby pharmacy to switch to.

``After the initial switch-over, the complaints are almost nonexistent, because the individuals are receiving their medications as they always have, just at another place,'' Pagni said.

But at the independent pharmacies they have left behind - and at those where their prescriptions are still accepted - the complaints haven't faded.

``They cut the reimbursement down to what we buy at,'' said Rob Frankil, owner of Skippack Pharmacy in Montgomery County and Sellersville Pharmacy in Bucks County. ``That doesn't pay for my bag or my label or my bottle or any of my other costs. They're just paying for the cost of the medicine.''

And in some cases, Frankil and other pharmacists said, Eagle isn't even paying that. Frankil cited several cases where Eagle's reimbursements for Medicaid patients' drugs were substantially below his cost.

As an example, Frankil cited methylphenidate, a generic form of Ritalin, which is prescribed mostly for children with attention deficit disorder. His current cost for 100 20-milligram tablets is $49.99. As of Thursday, Eagle would reimburse $33.85 for a Keystone Mercy member's prescription - leaving him with a loss of more than $16.

``If I want to stay in business, I cannot fill these prescriptions and process them to Eagle Managed Care,'' Frankil said.

By comparison, Frankil said he would be reimbursed $49.40 for the same drug if the patient carried a state employees' insurance card - a plan also administered by Eagle. ``That's a reasonable margin for a generic drug. It's not terrific, but not horrible either. I can operate on that,'' Frankil said.

Mead, the Rite Aid executive, said company officials ``agree that the rates are low'' but said Rite Aid suffered along with its competitors.

``Rite Aid participates at the same rate everyone else is offered. We have to take the cuts, too,'' Mead said. ``The reimbursement rates affect us as much as any other participant.''

Frankil and other Eagle critics say Rite Aid's defense is disingenuous. Rite Aid's source of revenue for the prescriptions it fills comes from the monthly per-person payment Eagle receives from Keystone Mercy, not from a reimbursement from its own subsidiary. Cutting the amount Eagle pays when prescriptions are filled elsewhere saves the parent corporation money rather than costing it, they said.

``It doesn't really matter whether they put the money in Rite Aid's pocket or Eagle's pocket. It's the same thing,'' Frankil said.

In addition, the critics say, Rite Aid reaps the benefit of increased traffic in its stores, which sell food and other items far removed from prescription drugs, many of which typically bring higher margins. Rite Aid says about 50 percent of its gross revenues come from prescription drugs, compared with 85 or 95 percent at a typical independent pharmacy.

``Perhaps they're using prescription drugs as a loss leader. If that's so, it's a really sad state of affairs,'' said Carmen A. DiCello, a Pottsville pharmacist who heads the Pennsylvania Pharmacists Association.

DiCello said the association has asked its lawyers to study whether it has any recourse, and is encouraging federal and state antitrust investigators to look into the situation.

``I've gotten inquiries from them. I can't tell you who, but they've called me,'' he said. `` . . . Certainly there's a great deal of interest in it.''

One official who has already begun examining Eagle's pharmacy benefits is Casey, the Democratic auditor general. He said the goal was to examine the Welfare Department's monitoring of Keystone Mercy's plan, ``specifically the availability and access to pharmaceutical services.''

Casey said he was prompted to do the audit by competing pharmacists' complaints, and by the decisions by CVS and Eckerd to drop out of the program.

Casey said he had two primary concerns: whether taxpayers were getting their money's worth from the contracts, and whether Medicaid clients' needs were being met. But he conceded that the auditor general's role was limited.

``We can audit these contracts and make sure that the Department of Public Welfare is in compliance. We cannot stop them or force them to change their policy,'' Casey said.