Health insurance is a logical response to the highly variable need for health care. But expected need for health care is not random, being related to characteristics such as age, gender and previous health care utilisation. Thus an entirely private system would tend to price high-risk individuals, the old and the sick, out of health insurance, denying them access to health care. There are two ways to address this dilemma: universal cover, a predominantly publicly-funded health insurance system supporting access to health care on the basis of need; or a safety-net system that provides selective public funding for defined ‘disadvantaged’ groups. Both theory and international evidence suggest that universal health insurance represents the more efficient and equitable response to this problem. The rationale for promoting private health insurance within a universal health insurance system, the situation in Australia, is unclear and cannot be justified on either equity or efficiency grounds.