OBJECTIVES: This paper describes how Ireland created a level playing field for competition in health insurance, the strategies of a major insurer to introduce risk-rated policies that would segment the market, the successful campaign to block these policies, and the policy implications of the European Union requirement of competition in health insurance. METHODS: Policy documents, interviews, and press reports were analyzed. RESULTS: The minister of health forced the commercial insurer to withdraw its policies and replace them with community-rated policies. CONCLUSIONS: Because it is easier and more profitable for insurers to engage in risk selection than to become more efficient, beneficial competition in health insurance markets is extremely difficult to create. Carefully drawn rules and monitoring are required to overcome inherent causes of market failure. The current enthusiasm for saving money through competitive schemes in health insurance seems likely to produce higher costs and greater inequality.