Gov. Schwarzenegger and Democratic legislators have agreed on a "discount" plan for prescription drugs that will hurt biotech investment and may cause drug prices to rise rather than drop. It also endangers Medi-Cal's ability to manage costs and beneficiaries' health.

The plan allows Medi-Cal to stop buying drugs from drug makers that resist new state-dictated discounts for uninsured Californians. The governor's "Medi-Cal hammer" is an odd proposal. Only last January, he rejected government price controls on drugs because "they will have a chilling effect on the research and development of lifesaving medicines and harm California's critical biotech industry," according to a letter he wrote to congressional leaders.

Professor Philip J. Romero, who was chief economist to former Gov. Pete Wilson, estimated that price controls similar to those in the governor's plan would decrease biotech investment and result in 23,900 to 105,600 jobs lost in California as well as a steep reduction in economic activity.

Maine tried this in 2000, litigated the pharmaceutical industry to a standstill in 2004, and launched a watered-down program without ever swinging the hammer. Today, drug makers still won't cooperate, so Maine takes discounts from taxpayers and pharmacies. About half of Maine's pharmacies are not participating.

The California drug plan is also poorly designed, with discounts calculated from a list price. When the government demanded discounts for Medicaid in 1990, it led to higher list prices, causing private buyers to pay more.

I estimate that the plan would bring discounts to 2 million Californians - if courts let the Medicaid hammer swing. Then, what will stop legislators from increasing the income cutoff or creating a universal discount? The result would be a "death spiral" of increasing prices, lost investment in biotech, and loss of access to medicines that keep Medi-Cal patients healthy.

Last November, when "consumer groups" put another version of this plan to the people, Prop. 79, Schwarzenegger and the voters rejected it.

Last year, the governor endorsed a voluntary plan that would have given drug makers and pharmacies confidence that offering discounts to the uninsured would not invite arbitrary and limitless government power over their businesses. He needs to revisit that proposal.

John Graham is director of health care studies at the Pacific Research Institute