Private health insurance membership declined steadily between 1984 and 1997, after which major government interventions caused it to increase. We review some of the literature and conclude that the increases in membership were probably associated with a loss of equity and cost-effectiveness for the health care system as a whole. We attempt to explain why the government made the changes and conclude that the main factors were vested interests of those who have benefited and a confusion of objectives. The changes may have resulted in a more balanced use of available resources (such as the balance between government and private hospital utilisation) but these and other desirable objectives might have been better achieved in other ways. We advocate that a more serious effort be made in future to ensure that policy takes more account of evidence, logic, and system-wide design and coherence.