Gov. Arnold Schwarzenegger is promoting his new discount drug plan as a "voluntary" agreement between pharmaceutical companies and the State of California. But it's more like a raw deal.

The California Prescription Drug Initiative calls upon drug manufacturers to offer five million low-income Californians huge discounts on prescription medications--up to 40% on brand-name drugs and a whopping 60% on generics.

Presumably, drug companies should offer these discounts out of the goodness in their hearts. But if they don't comply? Well, then they'll be coerced by the Terminator.

Companies failing to sell drugs at the government-imposed discount prices within five years can be kicked out of Medi-Cal, the multibillion-dollar health coverage system for low-income Californians.

Specifically, the discounted drugs would be available to uninsured Californians with incomes below 300% of the federal poverty level. That's $60,000 for a family of four. Certain Californians--like a family earning less than $68,310--with significant un-reimbursed medical expenses would also qualify.

"Our hope is the hammer won't be necessary," says California Secretary of Health and Human Services Kim Belshe.

This is voluntary?

There are good reasons to resist Gov. Schwarzenegger's drug deal.

For starters, most drug companies already have programs offering discounted--or even free--medicines for those in need.

Gov. Schwarzenegger might argue that beneficiaries of these existing discount programs must apply individually with every pharmaceutical company whose drugs they require.

But that's because drug companies aren't legally allowed to combine their individual plans into one simple-to-join program. Anti-trust laws prohibit them from doing so. It's illegal for private companies to work together to set prices--even discount prices for poor people.

In other words, Gov. Schwarzenegger wants the State of California to do what is illegal for pharmaceutical companies to do -- fix prices. His plan might make sense if government price controls actually worked. But in reality, they almost always have the exact opposite of their intended effect.

In the case of the Prescription Drug Initiative, pharmaceutical companies would need to compensate for the forced discounts by raising prices on people who don't qualify.

A family of four with a household income of $70,000 and a child with cancer might see its drug bills increase to offset discounts on hyperactivity medicines available to a family making $68,000.

Over the long term, Gov. Schwarzenegger's price controls would have an even more perverse effect. They would lead to fewer new medicines, particularly if other states follow California's example.

Today, it costs between $800 million and $1 billion to bring a new drug to market. Cancer patients have hope precisely because companies are willing to risk that money in developing drugs like Avastin, Erbitux, Gleevec, Herceptin, Nexavar, Sutent, and many others.

Ironically, if Gov. Schwarzenegger's plan had been implemented across the country 25 years ago, very few of these drugs would have been invented in the first place. There would be no life-saving medicines to discount.

If state governments make breakthrough drugs unprofitable, companies will simply stop trying to invent them. Researchers at the University of Connecticut's Center for Healthcare and Insurance Studies found that, since 1960, government interference in drug pricing caused $188 billion in lost spending on research and development. The "lost" medicines that might have been developed with that money could have saved 140 million life years.

There is a better way.

The market economy remains the best supplier of human needs--including health needs. It has made the United States the world leader in the research and development of new medications and in health care overall.

Rather than pushing for socialist price controls, Gov. Schwarzenegger should pursue free market ideas. He should support the federal legislation proposed by Rep. Shadegg (R., Ariz.) which allows people to shop for insurance across state lines. He could make health insurance premiums tax deductible. And he could promote changing the tax code in California so that contributions to Health Savings Accounts are not subject to state income tax.

Such policies would help people afford the drugs they need without creating economic distortions. And there would be no strong-arm tactics required. Of all people, Arnie should know better than to give someone a raw deal.

Ms. Pipes is president and CEO of the Pacific Research Institute and author of "Miracle Cure: How to Solve America's Health-Care Crisis and Why Canada Isn't the Answer" with a foreword by Milton Friedman.