AUGUSTA, Maine — Attorney General William Schneider’s determination that CanaRx, a Canadian firm that distributes prescription medications by mail, cannot be licensed in Maine imperils more than $3 million in annual savings budgeted for the state employees’ health plan.

The decision affects approximately 1,200 Maine households, according to CanaRx senior program adviser Chris Collins. It also poses financial repercussions for the city of Portland and Guilford-based Hardwood Products Co., both of which have contracted with CanaRx for years.

Through a program called MaineMeds, the Maine Division of Employee Health and Benefits contracted with CanaRx earlier this year to deliver brand-name prescription medications for conditions such as chronic asthma and cholesterol maintenance to state employees, their dependents and retirees who don’t qualify for Medicare. CanaRx offers reduced prices to plan providers and does not charge co-payments to participants, creating significant savings for both.

The MaineMeds deal saved approximately $500,000 between mid-May and mid-August and “was on track to save more than $3 million” during the fiscal year that ends June 30, 2013, according to Mary Anne Turowski, director of politics and legislation for the Maine State Employees Association, the union that represents state workers.

Those savings will have to be found elsewhere, after CanaRx shut down the MaineMeds program on Aug. 15, in response to an Aug. 14 letter from Schneider that reaffirmed his June 21 opinion that CanaRx was violating Maine law by distributing medications without a license.

“An unintended consequence might be that the health plan will have to go back to the administration to ask for more money,” Turowski said, noting that roughly 900 people had enrolled in MaineMeds. The deal with CanaRx resulted, in part, from an effort to achieve savings after the Legislature flat-funded the state employees’ health plan for the current two-year budget cycle, she said.

Laurie Williamson, executive director of the Maine Division of Employee Health and Benefits, did not return phone calls Thursday or Friday.

The city of Portland, which has saved approximately $3.2 million by working with CanaRx during the past eight years, will have to fill a $200,000 hole in this year’s budget caused by suspension of the Portland Meds program, according to Nicole Clegg, the city’s communications director. The 220 city employees and their dependents who lose access to CanaRx will pay, in total, about an extra $200,000 between now and the end of the fiscal year on June 30, 2013, she said.

Terry Young, president of Hardwood Products Co., said the firm and its employees will shoulder approximately $140,000 in additional prescription costs this year. “We, as a company, and the employees will lose those savings,” he said. “In [the past] six years, we’ve saved almost $700,000 in prescription drug costs” through CanaRx.

Launched in 2003, CanaRx provides mail-order pharmacy services to public-sector health plans in Illinois, Vermont, Rhode Island and other states. It reduces costs by sending medications directly from pharmaceutical plants in Canada, the United Kingdom, New Zealand and Australia to prescription holders. That international delivery system makes it impossible for the Maine Board of Pharmacy to license CanaRx, according to Schneider, who reviewed the situation after the Board of Pharmacy referred the matter to him following its June 7 meeting.

“This office agrees with the board’s determination that the international pharmacies that dispense prescription medications to state plan participants through MaineMeds are required by Maine law to be licensed by the board as mail order pharmacies,” Schneider wrote in a June 21 letter to Joseph Morris, a Chicago lawyer who represents CanaRx, which is based in Windsor, Ontario. “This office also agrees with the board’s determination that it lacks statutory authority to license mail order pharmacies that are located outside of the United States.”

On July, 3, Morris submitted a lengthy response. In a letter dated Aug. 14, Schneider replied, “Although I find your legal arguments unpersuasive, I appreciate and sincerely respect your offer to suspend shipments from unlicensed pharmacies into Maine pending a legislative solution to your problem.”

A day later, CanaRx notified MaineMeds participants of the program’s suspension.

“It’s a real shame because it hurts a lot of people,” Anthony Howard, chief executive officer of CanaRx, told the Bangor Daily News by phone. “This was kind of a shock to us. We had done 93 enrollment meetings and had been working with the state since early April.”

Howard called Maine’s law ambiguous because it doesn’t clearly define what “out of state” means in terms of licensing. “They have interpreted it to mean the other 49 states and U.S. territories,” he said. Schneider’s June 21 letter says that interpretation is “consistent with the board’s past practice and is also consistent with the Legislature’s intent.”

Changing state law to allow licensing of international mail-order pharmacies represents a remedy that CanaRx, Turowski, Young and Clegg endorse.

“We plan to submit a bill to change the law,” said Turowski, noting that legislators from both parties have indicated that they would support the measure. “In the interim, there’s not really much recourse until we go back into session.”

“If there is a movement to draft new legislation, we would help in any way we can,” Collins of CanaRx said.

The situation highlights the tension between protecting the interests of Maine employers and offering those employers means to rein in escalating health care costs. The Maine Merchants Association, writing on behalf of the Community Pharmacy Group, registered its concerns about the MaineMeds program in a May 30 letter to the Board of Pharmacy and its president, Joseph Bruno, the CEO of Community Pharmacies.

“Pharmacies are held to a very high standard of operations since the public health is at stake,” the letter states. “It is inherently unfair to require Maine-based businesses to follow one set of rules and regulations and essentially ignore those same rules for entities that are out of the country and not licensed.”

Young and Clegg argue that halting their long-term arrangements with CanaRx, which have yielded major savings, is unfair to Hardwood Products and Portland because it will force them to take on new costs in a difficult economic climate.

They also dismiss fears about low standards or lax quality control at CanaRx as unwarranted. Clegg said CanaRx has processed more than 17,000 prescriptions for Portland Meds without incident.

“It’s been terrific, and I say that not only as the head of the company but also as recipient of two prescriptions through CanaRx,” Young said. “We have proof and have seen other states that have inspected pharmacies that we get our medications from.”

“As a local employer and government entity, we have a responsibility to control costs,” Clegg said. Portland Meds “has not just been successful for the city but for its employees,” she added.

While acknowledging that Hardwood Products “as a company is trying to save money,” Young said his greatest fear is that a spike in costs will spur his employees to stop taking medications for conditions such as diabetes and asthma.

“We have many people here who are hourly employees,” he said. “We pay a fair wage, but the impact out of the family net income will be significant. More important than the money is the health and well being of the employees and their families. What dollar figure do you put on that?”