Fragmented health insurance systems create barriers to universal health coverage (UHC) and reinforce social inequalities in urban development. To address these challenges, China implemented an urban–rural medical insurance integration policy, aiming to unify fragmented schemes and equalize access to healthcare. Using data from the China Labor-force Dynamic Survey and policy implementation records across 337 prefecture-level cities, this study applies a staggered difference-in-differences (DID) design to estimate the causal effects of integration. The results show that the reform significantly increased universal health insurance coverage (UHI) in Chinese cities, raising coverage by about 5.6%. Mechanism analysis indicates that higher reimbursement rates and lower out-of-pocket expenditures enhanced individuals’ incentives to enroll. Heterogeneity analysis further reveals stronger effects among disadvantaged groups, such as those with lower education levels and older adults, while no crowding-out effect on commercial insurance is observed. The findings suggest that integrating fragmented health insurance systems can advance universal coverage and promote the equalization of public services, thereby contributing to more inclusive and sustainable cities.