This paper examines the market design in regulated health insurance markets, focusing on the comparison between subsidies and risk adjustment mechanisms. The authors argue that subsidies offer two key advantages over risk adjustment in markets with adverse selection: they provide greater flexibility in tailoring premiums to heterogeneous buyers and produce equilibria with lower markups and greater enrollment. Using demand and cost estimates from the California Affordable Care Act (ACA) marketplace, the study finds that subsidies can increase enrollment by 16 percentage points (76%) compared to risk adjustment, while all consumers are weakly better off. The theoretical framework and empirical analysis highlight the "markup effect" and the "targeting effect" of subsidies, where the former reduces markups and the latter increases enrollment by targeting different consumer types with different premiums. The paper also discusses the implications of these findings for policy and market design, emphasizing the importance of community rating and the potential for targeted subsidies to maximize enrollment and welfare.This paper examines the market design in regulated health insurance markets, focusing on the comparison between subsidies and risk adjustment mechanisms. The authors argue that subsidies offer two key advantages over risk adjustment in markets with adverse selection: they provide greater flexibility in tailoring premiums to heterogeneous buyers and produce equilibria with lower markups and greater enrollment. Using demand and cost estimates from the California Affordable Care Act (ACA) marketplace, the study finds that subsidies can increase enrollment by 16 percentage points (76%) compared to risk adjustment, while all consumers are weakly better off. The theoretical framework and empirical analysis highlight the "markup effect" and the "targeting effect" of subsidies, where the former reduces markups and the latter increases enrollment by targeting different consumer types with different premiums. The paper also discusses the implications of these findings for policy and market design, emphasizing the importance of community rating and the potential for targeted subsidies to maximize enrollment and welfare.