This paper analyzes the effectiveness of subsidies versus risk adjustment in regulated health insurance markets. The authors find that subsidies offer two key advantages over risk adjustment: they provide greater flexibility in tailoring premiums to heterogeneous buyers and produce equilibria with lower markups and greater enrollment. Using data from the California Affordable Care Act (ACA) marketplace, the authors estimate that subsidies can increase enrollment by 16 percentage points (76%) over risk adjustment while making all consumers weakly better off. The superiority of subsidies over risk adjustment stems from two distinct forces: the "markup effect," where subsidies lower insurers' markups for any coverage level, and the "targeting effect," where subsidies can reduce inefficiencies arising from adverse selection by targeting different buyers with different premiums. The authors also find that targeted subsidies can increase enrollment by about 16 percentage points (76%) while making all consumers weakly better off compared to risk adjustments that perfectly compensate insurers for expected risk. The paper highlights the importance of subsidies in achieving welfare gains in regulated health insurance markets.This paper analyzes the effectiveness of subsidies versus risk adjustment in regulated health insurance markets. The authors find that subsidies offer two key advantages over risk adjustment: they provide greater flexibility in tailoring premiums to heterogeneous buyers and produce equilibria with lower markups and greater enrollment. Using data from the California Affordable Care Act (ACA) marketplace, the authors estimate that subsidies can increase enrollment by 16 percentage points (76%) over risk adjustment while making all consumers weakly better off. The superiority of subsidies over risk adjustment stems from two distinct forces: the "markup effect," where subsidies lower insurers' markups for any coverage level, and the "targeting effect," where subsidies can reduce inefficiencies arising from adverse selection by targeting different buyers with different premiums. The authors also find that targeted subsidies can increase enrollment by about 16 percentage points (76%) while making all consumers weakly better off compared to risk adjustments that perfectly compensate insurers for expected risk. The paper highlights the importance of subsidies in achieving welfare gains in regulated health insurance markets.