GRAND RAPIDS, MICH. -- Upjohn Co. has joined the ranks of pharmaceutical companies bidding for states' Medicaid dollars in an effort to thwart government control of drug costs for the poor, and the state of Maryland has signed on as a participant.

Last week, Kalamazoo-based Upjohn followed other industry leaders' discount offers by proposing an across-the-board $1.35 rebate for each Medicaid prescription filled with its drugs. So far, Maryland is the only state it has signed, while competitor Merck & Co. has signed up 20 states.

As the bidding war escalates state by state, it's clear the competing pharmaceutical companies share a common goal: warding off proposed legislation that seeks to cap the cost of drugs sold to Medicaid -- now totaling $3.5 billion a year.

"I think it's a smart move to try to eliminate the need for legislation," said Ronald Nordmann, an industry analyst with PaineWebber Inc. "It probably won't mean much in terms of losses, either, since Medicaid sales represent only about 10 percent of the market."

But there's a catch: Any state that accepts a company's discount must offer all of its drugs to Medicaid patients, even the expensive ones that some states now refuse. That's expected to create monopolies in some states by knocking competing drugs off reimbursement eligibility lists.

Most of the largest drug companies have refused in the past to offer the same discounts to Medicaid programs that they have given to the departments of Defense and Veterans Affairs as well as hospitals and large health maintenance organizations.

But earlier this year, the U.S. Health and Human Services Department said it wanted to cut 1991 Medicaid expenditures by $300 million, prompting a legislative proposal that would restrict the drugs covered by Medicaid, thereby forcing competitive bidding by drug companies. Sen. David Pryor (D-Ark.), who introduced the bill, said it would save between $100 million and $200 million each year. Hearings on the plan will be held this month.

At least 19 state Medicaid programs have already limited the drugs offered to poor patients, often excluding more expensive, patented drugs, as a way to get the drug companies to negotiate. Medicaid officials say drug prices are the fastest-rising segment of their programs.

The Pharmaceutical Manufacturers Association is adamantly opposed to legislation that would restrict access to any drug. It says a federally mandated program for competitive bidding would lead to inferior health care for the poor. "Under the bill, manufacturers of chemically different drugs that treat the same disease would be required to bid against each other and the cheapest medicines -- which are almost always the oldest ones -- would win the bid," association spokesman Jeff Trewhitt said. "Medicaid patients would be deprived of some medicines and in many cases would be getting second-class care."

Pryor, chairman of the Senate Special Committee on Aging, said last week the discount plans -- offered by Merck, Pfizer Inc., Glaxo Inc. and Upjohn -- aren't enough. " ... The savings for Medicaid and the safeguards to assure these savings are just not there," Pryor said.