Bang! New Identity Health
No, that means when you switch to the other character your health is set at 2 points and on your turn you can gain the missing health back. Which means that if you are switching to a character that has 4 bullets normally you can then play a whiskey to go back up to 4 bullets in health. Also if you are the sheriff in this game you could follow up with a beer and be back up to 5 health with the +1 health bonus for being sheriff.

What the setting to two life does is impose a penalty for switching if you are above 2 live or a small bonus for switching if you are at 1 life.