Conventional economic theory has concluded that the additional health expenditures generated by insurance coverage are bad for society and lead to inefficiently high health care expenditures. To reduce costs, economists have promoted solutions--cost sharing insurance policy and managed care--designed to reduce this additional care. This article discusses a new theory of insurance that suggests that much of these additional health expenditures are actually efficient and good for society. As a result, insurance coverage is much better for society than economists have thought. Also, the policy prescriptions are different. The new theory suggests that cost sharing should be applied sparingly, that policy should focus on reducing high prices in order to reduce health expenditures, and that the uninsured should be insured under some type of national insurance program.