President Bush will make two bold proposals in his State of the Union message tonight. First, he would cap the tax benefits available to people who get insurance through employers and use the savings to give tax relief to those who buy their own insurance. Second he would redirect federal funds that currently pay for free health services for the uninsured and use them to subsidize private insurance instead. Here is one way to think about this and other Bush health initiatives. Many of our problems in health care stem from four distortions cause by government policies:

1. Tax law favors third-party insurance over individual self insurance (through savings accounts).
2. Tax law favors employer-provided insurance over individually-purchased insurance.
3. Spending on free health care makes being uninsured more attractive than being insured.
4. Spending on Medicaid, S-CHIP, etc. makes government insurance more attractive than private insurance.

The first distortion is why Americans are over insured and why medical markets do not work like other markets; e.g., no price or quality transparency. The second distortion is why health insurance is not portable. The third distortion is why the uninsurance rate remains high. The fourth distortion is why the uninsurance rate does not go down, despite higher taxes and higher spending. Solving health care problems means eliminating all four distortions. (See my article "Applying the ‘Do No Harm' Principle to Health Policy") Toward this end:

• President Bush has made a major effort to eliminate distortion 1 through his promotion of health savings accounts.
• The new Bush tax initiative will help eliminate distortion 2.
• Following the lead of Governor Romney in Massachusetts, the new Bush spending initiative will help eliminate distortion 3.
• Although not part of the State of the Union proposals, the Bush Administration has encouraged Gov. Bush (FL) and Gov. Sanford (SC) and others to seek Medicaid waivers that will help eliminate distortion 4.

What we need are four level playing fields. The Bush health agenda is moving in that direction.