Panel a shows demand and consumer sorting under the vertical model. $WH(s)$ and $WL(s)$ are willingness to pay for the $H$ and $L$ plans. $DH(s;PL)$ is the demand curve for $H$ (as a function of $PH$⁠), which depends on the value of $PL$⁠. See the body text for additional description. Panel b shows the cost curves for $H$ and $L$ plans under the vertical model. $CH(s)$ and $CL(s)$ are the consumer type-$s$ specific costs. $ACH(sHL)$ and $ACL(sLU;sHL)$ are the average cost curves for $H$ and $L$ given that the intensive margin type is $sHL$ and the extensive margin type is $sLU$⁠. Adverse selection makes the price difference $PH-PL$ larger than the causal cost difference.