Candice Horbacz
The United States federal government’s fiscal health is on an unsustainable path, largely propelled by an escalating pattern of subsidies and tax preferences within the healthcare sector. Projections from the Congressional Budget Office (CBO) paint a sobering picture, indicating that under current law, deficits as a share of Gross Domestic Product (GDP) are poised to climb from 5.8 percent in 2026 to 6.7 percent by 2036, marking what could be the most prolonged period of high deficits in the nation’s history. This upward trend is expected to continue, reaching 9.1 percent by 2056. Concurrently, public debt is forecast to surpass 100 percent of GDP in 2026, hitting a new record high of 106 percent within the subsequent four years, before escalating further to 120 percent by 2036 and a staggering 175 percent by 2056. This fiscal imbalance is primarily driven by federal spending outpacing economic growth and tax revenues, with spending projected to rise from 23.3 percent of GDP in 2026 to 24.4 percent in 2036 and 27.9 percent by 2056, significantly exceeding the 50-year average of 21.1 percent. Revenues, meanwhile, are only expected to modestly grow from 17.5 percent of GDP in 2026 to 17.8 percent in 2036 and 18.8 percent in 2056.
Healthcare’s Dominance in Federal Outlays
The most substantial and rapidly expanding segment of federal expenditure is major healthcare programs, encompassing Medicare, Medicaid, Affordable Care Act (ACA) subsidies, and the Children’s Health Insurance Program (CHIP). A comprehensive analysis reveals that total federal healthcare spending, including numerous smaller programs distributed across various agencies, now accounts for nearly one-third of the entire federal budget. This figure dramatically overshadows spending in other critical sectors, with healthcare expenditures far exceeding those for national defense or any other single industry. In 2025, the federal government allocated an estimated $2.18 trillion to healthcare, representing 31.2 percent of the federal budget and 7.2 percent of GDP. This amount was more than a third (36.2 percent) of all non-interest federal spending and more than double the defense budget, which stood at $855 billion in 2025 (excluding the Defense Health Program), or 12.2 percent of the federal budget.
Comparatively, other sector-specific spending in 2025 was considerably lower: agriculture and food assistance at $197 billion (2.8 percent of the budget), transportation at $145 billion (2.1 percent), education and training at $88 billion (1.3 percent), housing at $78 billion (1.1 percent), and energy at a mere $21 billion (0.3 percent). These figures underscore healthcare’s unparalleled fiscal footprint.
The Historical Ascent of Federal Healthcare Spending
The federal government’s involvement in healthcare spending has witnessed an astronomical surge over several decades. Prior to the advent of Medicare and Medicaid in the 1960s, federal health program expenditures were a modest $2.3 billion in 1962, constituting about 2.1 percent of the budget and roughly 0.4 percent of GDP. At that time, total healthcare spending from all sources—federal, state, local, and private—was 5.4 percent of GDP, with the federal government covering only 7.2 percent of that total. The landmark legislation establishing Medicare and Medicaid in 1965 fundamentally altered this landscape, expanding benefits and eligibility for millions of Americans.
This foundational shift, coupled with an aging population, increased national income, and persistent rises in healthcare costs, propelled federal healthcare spending into its current dominant position. By 2025, overall national healthcare spending reached 18.4 percent of GDP, with the federal share swelling to 39.3 percent. Major programs like Medicare and Medicaid have become cornerstones of this growth. In 2025, Medicare spending (net of premiums) exceeded $996 billion, or nearly 3.3 percent of GDP, while Medicaid surpassed $668 billion, accounting for 2.2 percent of GDP. Other significant federal healthcare outlays include veterans’ medical care, costing over $148 billion (0.5 percent of GDP), and health insurance assistance, primarily ACA premium tax credits (PTCs), which amounted to $129 billion (0.4 percent of GDP) in 2025.
The Compounding Effect of Tax Preferences
Beyond direct spending, the federal tax code provides a vast array of preferences for the health sector, significantly compounding the fiscal cost. These "tax expenditures" represent revenue losses from credits, deductions, exclusions, and other special carve-outs. According to the U.S. Treasury Department and the Joint Committee on Taxation, the health sector benefits from the most heavily tax-favored status in the economy. In 2025, healthcare preferences were estimated to cost over $500 billion annually.
The largest of these tax preferences is the exclusion for employer-sponsored health insurance (ESI) premiums. This exclusion reduced federal income tax revenue by an estimated $279 billion and federal payroll tax revenue by $171 billion in 2025. Other major health tax preferences, including health savings accounts, the deductibility of medical expenses, charitable contributions to health institutions, and self-employed medical insurance premiums, collectively cost approximately $50 billion in 2025. The Treasury’s total estimate for health sector tax expenditures in 2025 was $512 billion, a figure that does not even include the tax exemption for hospitals, which alone cost about $12 billion in 2021.
When compared to other sectors, healthcare’s tax-favored status is striking. The $512 billion for the health sector constituted about 26 percent of all tax expenditures, which totaled approximately $2 trillion in 2025. By contrast, tax expenditures for housing amounted to $309 billion (16 percent), education and training $111 billion (6 percent), and energy $64 billion (3 percent) in the same year. Moreover, if one filters out "neutral" tax provisions (those that align the tax code with a consumption tax base, like IRAs and expensing for capital investment), the disparity becomes even more pronounced. Of the $1.2 trillion in non-neutral tax expenditures in 2025, the health sector alone accounted for $512 billion, or 43 percent. This demonstrates a significant distortion in the tax code, directing a disproportionate share of federal support towards healthcare.
Historically, while the fiscal cost of federal healthcare tax preferences has grown slower than direct federal healthcare spending, it has still increased faster than GDP. As a share of GDP, these preferences rose from 1.4 percent in 1994 (the earliest available data) to 1.7 percent in 2025, with ESI contributing approximately 90 percent of this cost. In stark contrast, all other non-neutral tax expenditures collectively shrank from about 3.3 percent of GDP in 1994 to 2.3 percent in 2025, largely due to reforms like the 2017 Tax Cuts and Jobs Act. Consequently, healthcare’s share of all non-neutral tax expenditures has expanded from 29 percent in 1994 to 43 percent in 2025.
In aggregate, the total fiscal cost of federal healthcare subsidies and carve-outs—combining direct spending and tax preferences—reached nearly $2.7 trillion in 2025, equivalent to 8.9 percent of GDP. This staggering sum represents 48.5 percent of all national health spending from every source, highlighting the federal government’s increasingly dominant role in the U.S. healthcare system.
Economic Distortions and Market Impacts
The extensive network of healthcare subsidies and tax preferences is not merely a fiscal burden; it also introduces significant economic distortions and compromises market neutrality. The exclusion for ESI, for instance, distorts both the labor and healthcare markets. It incentivizes employers to channel compensation towards tax-free ESI benefits rather than taxable cash wages, and it favors costly, employment-tied insurance coverage over more portable options or direct payments to healthcare providers. Such large-scale government intervention, by effectively "picking winners and losers," can stifle innovation, reduce consumer choice, and lead to inefficient resource allocation within the healthcare sector.
Furthermore, the cost of federal health insurance assistance, primarily ACA premium tax credits (PTCs), has more than doubled since the pandemic, soaring from $52 billion in 2020 to $129 billion in 2025. This surge followed enhancements made through the American Rescue Plan Act of 2021, which were subsequently extended through 2025 by the Inflation Reduction Act of 2022. These enhancements reduced the maximum premium contribution for eligible enrollees and extended eligibility to individuals earning above 400 percent of the poverty level, further expanding the federal government’s fiscal commitment to health insurance subsidies.
Projections and Future Challenges
Despite some recent legislative efforts to rein in spending, the underlying trend of escalating federal healthcare subsidies persists. The Congressional Budget Office’s projections, based on current law (and assuming the expiration of ACA PTC enhancements), indicate that while a hypothetical "One Big Beautiful Bill Act" (OBBBA) might reduce federal healthcare spending by approximately $1 trillion over the next decade, growth in these programs will still continue, albeit at about half the historical rate. Even with these assumed changes, federal healthcare spending is projected to rise from 7.2 percent of GDP in 2025 to about 7.8 percent in 2035.
Similarly, healthcare tax expenditures are projected to increase from 1.7 percent of GDP in 2025 to roughly 1.9 percent in 2035. This means healthcare’s share of non-neutral tax expenditures is set to grow from 43 percent in 2025 to over 49 percent by 2035. When combined, the total fiscal cost of federal healthcare subsidies and carve-outs is projected to increase from 8.9 percent of GDP in 2025 to approximately 9.7 percent of GDP by 2035. These projections underscore the persistent fiscal challenge posed by the healthcare sector. The complexity of health policy, coupled with unforeseen demographic shifts and medical advancements, makes precise long-term projections difficult and subject to considerable uncertainty.
Pathways to Fiscal Sustainability and Reform Options
Addressing the unsustainable trajectory of federal healthcare subsidies is a critical imperative for lawmakers. While improving affordability, access, and quality remain vital goals, the overarching concern must be the long-term sustainability of these federal commitments. The urgency is amplified by the burgeoning national debt, with interest costs alone projected to reach an all-time high of over $1 trillion (3.3 percent of GDP) this fiscal year, climbing to more than 4.5 percent of GDP over the next decade. The primary deficit, excluding interest costs, is expected to average more than 2 percent over the next decade, pushing total deficits to levels unprecedented in peacetime.
Fiscal policy organizations, such as the Tax Foundation, have modeled potential reforms. For example, capping or eliminating the largest healthcare tax expenditure—the exclusion for employer-sponsored health insurance—could generate substantial revenue. Eliminating the income tax exclusion alone is estimated to raise about $2.4 trillion over the next decade (dynamically), while eliminating the payroll tax exclusion could add another $1.6 trillion. These figures demonstrate the significant fiscal leverage held within the tax expenditure side of healthcare policy.
However, the spending side offers even greater scope for savings. The CBO has outlined numerous options to reduce Medicare and Medicaid spending that could save trillions of dollars over the next decade. These include building on hypothetical reforms like the OBBBA, such as capping federal spending on Medicaid, limiting state taxes on healthcare providers, reducing federal Medicaid matching rates, increasing premiums paid for Medicare, and requiring site-neutral payments. Such reforms aim to curtail waste, improve efficiency, and alleviate cost pressures within the sprawling federal healthcare apparatus.
Ultimately, a fundamental shift in approach is advocated by many policy experts. Rather than continuing to subsidize inefficient healthcare programs, lawmakers are urged to institute market-based reforms. This involves fostering greater competition, encouraging innovation, and empowering consumer choice to finally "bend the cost curve" downward. The goal is to move towards a healthcare system that is not only accessible and high-quality but also fiscally responsible and sustainable for future generations. The current trajectory, if unchecked, threatens to exacerbate national debt, crowd out other essential federal investments, and compromise the long-term economic stability of the United States.
