Market Design in Regulated Health Insurance Markets: Risk Adjustment vs. Subsidies

Health insurance is increasingly provided through managed competition, in which subsidies for consumers and risk adjustment for insurers are key market design instruments. We illustrate theoretically that, in markets with adverse selection, subsidies provide greater flexibility in tailoring premiums to heterogeneous buyers, and produce equilibria with lower markups and greater enrollment. We assess these effects quantitatively using estimates from the California ACA marketplace.