We use data on health plan choices by employees of Harvard University to compare the benefits of insurance competition with the costs of adverse selection. Moving to a voucher-type system induced significant adverse selection, with a welfare loss of 2 to 4 percent of baseline spending. But increased competition reduced Harvard's premiums by 5 to 8 percent. The premium reductions came from insurer profits, so while Harvard was better off, the net effect for society was only the adverse selection loss. Adverse selection can be minimized by adjusting voucher amounts for individual risk. We discuss how such a system would work. Governments are increasingly turning to market forces as a way to limit the cost of social insurance. Traditionally, social insurance programs were operated as nonmarket goods; governments mandated participation in a central program, collected revenues to finance the program, and ran the insurance system. There was no role for competition among suppliers in providing the basic benefit. As the costs of social insurance have increased, however, the centralized model of social insurance is coming under increasing strain. In the United States, for example, recent proposals have called for replacing the Medicare program with a health care voucher for the elderly [Aaron and Reischauer 1995; Cutler 1996]. The voucher would guarantee people a basic insurance plan, but the plans would be privately run. Competition among plans would generate plan premiums and enrollments. Similarly, longstanding proposals for Social Security reform have called for replacing the current system with a system of individual accounts, where people would make saving, investment, and annuitization decisions on their own [Advisory Council on Social Security 1996; Feldstein 1996]. The trend is not just domestic. In the United Kingdom the National Health Service has moved to encourage more competition in recent years, with the establishment of hospital trusts that bid for patients and partially fixed payments to physicians,