Cato’s Michael Cannon is misguided in his criticism of Gov. Mitch Daniels’s Healthy Indiana Plan. HIP could not be more different than the government-controlled entitlement programs created by President Obama and former Massachusetts governor Mitt Romney.

It is especially odd that Cannon would criticize HIP, since it is built on the foundation of health savings accounts, which Cato has championed for more than two decades.

Governor Daniels devised a unique plan to expand health coverage to the uninsured through a Medicaid waiver and a new cigarette tax. But rather than creating a path to dependency, as Cannon charges, HIP creates incentives for people to spend and utilize health services wisely.

Traditional Medicaid promises virtually unlimited medical services, if people can find a doctor or hospital to provide them, with few if any financial obligations.

By contrast, HIP helps people transition from an entitlement program to a plan that operates much more like private insurance. It requires members to make monthly contributions (i.e., premiums) to a Personal Wellness and Responsibility (POWER) account. The state and the member both contribute on a sliding income scale, for a total of $1,100 a year.

Anything the member spends on health care comes out of the account first. If the account is exhausted, then “catastrophic” coverage is provided through Medicaid. State spending is capped at the revenues that are available, so enrollment is limited.

Cannon calls this a “taxpayer-funded health savings account” and makes is sounds like the state is handing out cash. It’s not. He needs to get his facts straight. The state and the participants work in partnership to jointly fund the POWER account. Those closest to the income limit — 200 percent of poverty, about $22,000 for an individual — fund the account almost entirely on their own.

Three-quarters of those participating in the program make monthly contributions to their POWER accounts. (The rest don’t contribute because their incomes are below thresholds.) If people don’t make the required contribution to their account, they are tossed out of the program. Because of that, 97 percent make the payment, according to a Mathematica Policy Research study.

It sounds to me like Governor Daniels got the incentives right.

And HIP also rewards people if they get preventive care. If they get screening tests, vaccinations, etc., all the funds remaining in their POWER account at the end of the year can roll over to the next to reduce the member’s monthly contributions.

This is exactly what we want our health-care system to do: provide incentives for individual responsibility in using the system and spending health-care dollars wisely, and rewarding people who follow sensible rules. And there is cost transparency: Members receive a monthly statement showing their POWER balances.

Seventy percent of those in the program have incomes at or below the federal poverty level and would be unlikely to have coverage otherwise, yet a high proportion have serious chronic conditions that likely would have landed them in hospital emergency rooms for care rather than doctor’s offices.

Cannon is right to criticize Medicaid — arguably the worst health program in the country. But if he were to think about how we would want to transition to a more functional Medicaid program, HIP provides a successful model. It is actually a bridge to private insurance, not an entitlement trap, as Cannon charges.

Cannon also criticizes Daniels for deciding to set up minimal infrastructure for the health exchanges that Obamacare requires of the states. Because his term expires in 2012, Daniels will not be governor when the deadline comes to have the exchange in place, and he says he doesn’t want to put his successor in a bind and leave Hoosiers unprotected. If no state exchange is in place and the law is not repealed or overturned, then the feds will come in and surely institute an aggressive government-controlled program.

While there are differences about this in the free-market policy community, I am advising governors to set up a minimal exchange based upon the Utah model as firewall protection. HHS secretary Kathleen Sebelius already has said the Utah model will qualify. These purchasing exchanges can be a vehicle to allow a defined contribution for health insurance, portability, and more choices for individuals and small groups.

So Mike Cannon is misguided. Governor Daniels is doing us a favor by showing how Medicaid could be transformed into a program that would encourage individual responsibility and a wiser expenditure of taxpayer dollars without expanding massive open-ended entitlement spending as Obamacare does. Rather than criticizing Governor Daniels, we should be thanking him.

A final note of caution: If Obamacare isn’t repealed, HIP will likely have a tombstone saying “R.I.P.,” since it provides far too much consumer choice and individual authority to satisfy Washington regulators.