Merck & Co., the world's largest pharmaceutical firm, said yesterday that it will sell prescription drugs to California's Medicaid program at discounts expected to range from 7 to 12 percent off its normal wholesale prices.

California state health director Kenneth W. Kizer said said he expected the nation's largest Medicaid program would save $2.8 million on its annual Medicaid prescription bill of $600 million. In return California agreed to add four Merck drugs to the list of pharmacueticals approved for use by its Medicaid patients. Medicaid provides medical care for low-income people and is jointly funded by states and the federal government.

Merck president John Zabriskie said the company has reached similar discount agreements with Washington state and South Carolina and that negotiations are underway with other jurisdictions -- including the District.

Lee Partridge, director of the D.C. Medicaid program said "we like" the discount program submitted by Merck but no agreement has been struck.

Some congressional sources see the California agreement as a step in Merck's strategy to ensure its products are not pushed out of the lucrative Medicaid market. Pending legislation would require states to take competitive bids from manufacturers of "therapeutically equivalent" drugs. The drug made by the winning bidder would then become the only one used in the program for the bidding period.

Sen. David Pryor (D-Ark.), who sponsored the bill, argues that Medicaid progams pay far higher prices than other volume purchasers of prescription drugs, such as the Veterans Administration.

The bill would not require bids if a state is already getting reasonable discounts on a drug. Several other drug companies are considering following Merck's approach, industry sources said, to make sure their drugs remain eligible for Medicaid. California's Kizer coinfirmed his state's program is negotiating with several other drug companies.

Merck promised California it would charge the state a price no higher than it charges its lowest paying customers, including government agencies like the Veterans Affairs Department. Drugs account for about 7.5 percent of the $8 billion California's Medicaid program spends each year.

Besides adding four Merck drugs to the program, California also agreed to keep in the program any Merck drug already authorized, an attempt to make sure no Merck drug gets squeezed out by future federal laws.

The discount agreement applies to sole-source drugs made by Merck for which there is no identical chemical clone.

An aide to Pryor said the senator wanted to spur exactly these types of arrangements when he introduced the legislation. "He feels that if Merck is able to do this, certainly the others should be able to follow suit," the aide said.