Candice Horbacz
The federal government’s financial stability is increasingly imperiled by an escalating pattern of healthcare subsidies and tax preferences, pushing the nation towards unprecedented levels of debt and deficits. Projections from the Congressional Budget Office (CBO) indicate that, under current law, deficits as a share of GDP will climb from 5.8 percent in 2026 to a staggering 9.1 percent by 2056, marking the largest sustained deficits in U.S. history during peacetime. Concurrently, public debt is set to breach 100 percent of GDP in 2026, reaching 106 percent within the next four years and an alarming 175 percent by 2056. This perilous trajectory is primarily fueled by rapid growth in federal spending, particularly within the healthcare sector, which consistently outpaces economic expansion and tax revenue generation.
The Escalating Fiscal Imbalance
The core of the nation’s fiscal challenge lies in the widening gap between federal spending and revenue. The CBO’s latest projections underscore a concerning trend: federal spending is anticipated to rise from 23.3 percent of GDP in 2026 to 24.4 percent in 2036, further escalating to 27.9 percent by 2056. This far exceeds the average spending level of 21.1 percent observed over the last five decades, signaling a significant departure from historical fiscal norms. In stark contrast, revenues are projected to grow at a slower pace, moving from 17.5 percent of GDP in 2026 to 17.8 percent in 2036 and 18.8 percent in 2056. This persistent imbalance is creating a structural deficit that, if unaddressed, threatens long-term economic stability.
A significant portion of this fiscal strain is attributable to the healthcare sector. Analysts at the Congressional Budget Office, the Treasury Department, and the Office of Management and Budget (OMB) consistently highlight major healthcare programs—including Medicare, Medicaid, Affordable Care Act (ACA) subsidies, and the Children’s Health Insurance Program (CHIP)—as the largest and fastest-growing category of federal outlays. This comprehensive assessment reveals that the total federal commitment to healthcare, encompassing both direct spending and various tax preferences, now consumes nearly one-third of the entire federal budget.
Healthcare’s Dominance in Federal Spending
In 2025, federal healthcare spending reached an estimated $2.18 trillion, representing a substantial 31.2 percent of the federal budget and 7.2 percent of the nation’s GDP. To put this into perspective, healthcare expenditures, including flagship programs like Medicare and Medicaid, constituted over one-third (36.2 percent) of all non-interest federal spending for the year. This figure is more than double the size of the national defense budget, which totaled $855 billion in 2025 (excluding the Defense Health Program) or 12.2 percent of the federal budget. The sheer scale of healthcare spending dwarfs other sector-specific allocations, such as agriculture and food assistance ($197 billion or 2.8 percent), transportation ($145 billion or 2.1 percent), education and training ($88 billion or 1.3 percent), housing ($78 billion or 1.1 percent), and energy ($21 billion or 0.3 percent).
This profound shift in federal priorities is not a recent phenomenon but the culmination of decades of policy evolution. Prior to the establishment of Medicare and Medicaid in the 1960s, federal healthcare spending was minimal, amounting to just $2.3 billion in 1962, or about 2.1 percent of the budget and 0.4 percent of GDP. At that time, the federal government’s share of total national healthcare spending (from all sources including state, local, and private) was a mere 7.2 percent. Today, overall national healthcare spending has surged to 18.4 percent of GDP as of 2025, with the federal share ballooning to 39.3 percent. This dramatic increase reflects expansions in program benefits and eligibility, an aging population, rising incomes, and persistently increasing healthcare costs across the board.
Major Federal Healthcare Programs Under Scrutiny
Within the vast landscape of federal healthcare spending, several key programs stand out due to their immense scale and rapid growth. As of 2025:
- Medicare: Spending, net of premiums, surpassed $996 billion, accounting for nearly 3.3 percent of GDP. This program provides health insurance to Americans aged 65 or older, younger people with disabilities, and people with End-Stage Renal Disease.
- Medicaid: Expenditures exceeded $668 billion, representing 2.2 percent of GDP. Medicaid is a joint federal and state program that provides health coverage to millions of low-income Americans.
- Veterans’ Medical Care: This crucial service for former military personnel cost over $148 billion, approximately 0.5 percent of GDP.
- Health Insurance Assistance (ACA Subsidies): Primarily composed of Affordable Care Act (ACA) premium tax credits (PTCs), this category cost $129 billion, or about 0.4 percent of GDP. The federal government classifies about 90 percent of PTC costs as outlays due to their refundable nature, where the credit can exceed a taxpayer’s liability.
The cost of federal health insurance assistance has seen a particularly sharp increase, more than doubling from $52 billion in 2020 to $129 billion in 2025. This surge followed temporary enhancements made to PTCs as part of the American Rescue Plan Act of 2021, which were subsequently extended through the end of 2025 by the Inflation Reduction Act of 2022. These enhancements lowered the maximum premium contributions for eligible enrollees and broadened eligibility to individuals earning above 400 percent of the poverty level. The expiration of these more generous subsidies in 2025 is a critical factor in future projections.
Other health programs, totaling $242 billion (0.8 percent of GDP) in 2025, include the Defense Health Program, which has steadily grown from $53 billion in 2020 to $61 billion in 2025, and various smaller programs that saw a temporary funding spike during the pandemic, reaching $238 billion in 2020 before settling at $181 billion in 2025.
The Hidden Hand: Tax Preferences for Health Care
Beyond direct spending, the federal tax code offers substantial, often less visible, subsidies to the healthcare sector through tax preferences, also known as tax expenditures. These provisions, which include exclusions, deductions, and credits, reduce federal tax revenues by allowing taxpayers to keep more of their income. The U.S. Treasury Department and the Joint Committee on Taxation estimate that healthcare preferences collectively cost over $500 billion annually, making health care the most heavily tax-favored sector in the American economy.
The largest of these tax preferences is the exclusion for employer-sponsored health insurance (ESI) premiums. In 2025, this exclusion reduced federal income tax revenue by an estimated $279 billion and federal payroll tax revenue by $171 billion. This substantial tax break encourages employers to offer health insurance as a tax-free benefit, often at the expense of taxable cash wages. This distorts both the labor market, by favoring non-cash compensation, and the healthcare market, by promoting employment-tied, often more costly, insurance over portable coverage or direct payments to providers.
Other significant health tax preferences include health savings accounts, the deductibility of medical expenses, the deductibility of charitable contributions to health institutions, and the deductibility of self-employed medical insurance premiums, collectively costing about $50 billion in 2025. While the Treasury’s official tally of health sector tax expenditures totaled $512 billion in 2025, this figure does not account for the tax exemption granted to hospitals, which, according to some estimates, cost approximately $12 billion as of 2021. In total, Treasury’s health tax expenditures represent about 9 percent of all U.S. healthcare spending from all sources.
Comparing healthcare tax preferences to other sectors highlights its favored status. The $512 billion allocated to the health sector accounts for roughly 26 percent of all tax expenditures, which totaled around $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). When focusing solely on "non-neutral" tax expenditures—those that actively subsidize certain activities rather than merely aligning with an ideal consumption tax base—the health sector’s share becomes even more pronounced. Of the estimated $1.2 trillion in non-neutral tax expenditures in 2025, healthcare accounts for $512 billion, or 43 percent. This signifies that nearly half of all non-neutral tax breaks in the U.S. economy are directed towards health care.
Historically, the fiscal cost of federal healthcare tax preferences has grown, albeit at a slower rate than direct federal healthcare spending. As a share of GDP, these preferences increased from 1.4 percent in 1994 (the earliest available data) to 1.7 percent in 2025, with ESI consistently making up about 90 percent of this cost. In the same period, other non-neutral tax expenditures actually shrank from 3.3 percent of GDP in 1994 to 2.3 percent in 2025, partly 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 a dominant 43 percent in 2025.
When combining both direct federal healthcare spending and tax expenditures, the total fiscal cost of federal healthcare subsidies and carveouts reached nearly $2.7 trillion in 2025. This equates to 8.9 percent of GDP and a striking 48.5 percent of all U.S. healthcare spending from all sources. This figure underscores the federal government’s increasingly dominant financial role in the nation’s health system.
Future Projections and Policy Complexities
The upward trajectory of federal healthcare spending as a share of GDP has been remarkably consistent, growing by slightly more than one percentage point per decade over the last six decades. While this trend has faced recent attempts at moderation, the complexity of the health sector makes future projections inherently uncertain.
For instance, recent legislative actions and administrative decisions have attempted to temper growth. The hypothetical "One Big Beautiful Bill Act" (OBBBA), for example, aimed to tighten rules and reduce eligibility for Medicaid and ACA premium tax credits. Additionally, the Trump administration and Congress allowed more generous ACA plan subsidies to expire in 2025. More recently, the Trump administration denied an extension of subsidies for Medicare Part D prescription drug plans, though any potential savings from this action might be offset by unanticipated growth in Part D spending following changes made as part of the Inflation Reduction Act of 2022.
Despite these efforts, the CBO’s current law projections, which assume the expiration of the ACA’s PTC enhancements, still forecast continued growth. Even with the hypothetical OBBBA reducing federal healthcare spending by an estimated $1 trillion over the next decade, the growth in these programs is projected to fall to only about half the historical rate, rising from 7.2 percent of GDP in 2025 to approximately 7.8 percent in 2035. Healthcare tax expenditures are also projected to grow from 1.7 percent of GDP in 2025 to about 1.9 percent in 2035, with healthcare’s share of non-neutral tax expenditures climbing from 43 percent to over 49 percent in the same period. Combined, the total fiscal cost of federal healthcare subsidies and carveouts is set to rise from 8.9 percent of GDP in 2025 to about 9.7 percent of GDP in 2035. These projections highlight that even with recent legislative interventions, the fundamental upward pressure on healthcare costs remains formidable.
The Urgent Need for Sustainable Healthcare Reforms
The escalating cost of federal healthcare subsidies poses a critical threat to the nation’s fiscal health, demanding that lawmakers prioritize sustainability alongside goals of improving affordability, access, and quality. The implications of unchecked spending extend far beyond the healthcare sector itself. Interest costs on the federal debt, for instance, are projected to reach an unprecedented high of over $1 trillion, or 3.3 percent of GDP, this fiscal year, before growing 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 the total deficit to levels never sustained during peacetime. This spiraling debt crowds out other essential investments, increases borrowing costs, and risks economic instability.
Addressing this challenge requires a multi-pronged approach, targeting both tax expenditures and direct spending programs. On the tax side, the Tax Foundation has modeled options to cap or eliminate the exclusion for employer-sponsored health insurance (ESI), the largest healthcare tax expenditure. Their analysis suggests that eliminating the income tax exclusion alone could raise approximately $2.4 trillion over the next decade (dynamically), while eliminating the payroll tax exclusion could generate an additional $1.6 trillion. While other tax expenditures could be limited, the spending side of the ledger offers significantly 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 proposals include building on the hypothetical OBBBA by 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 for healthcare services. Beyond specific program adjustments, reform efforts must also focus on reducing waste, improving efficiency, and easing cost pressures throughout the healthcare system. Experts from organizations like the American Enterprise Institute and the Peter G. Peterson Foundation have repeatedly highlighted that a substantial portion of healthcare spending is considered wasteful, emphasizing the potential for significant savings through better management and targeted reforms.
Instead of continuing to rely on subsidies that often perpetuate inefficiencies and distort market dynamics, policymakers are increasingly urged to consider market-based reforms. Such reforms could foster greater competition, encourage innovation, and empower consumer choice, ultimately working to "bend the cost curve" downward. This shift away from government-dominated fiscal measures towards a more market-oriented approach is seen by many as essential to achieve a sustainable fiscal trajectory for healthcare and, by extension, for the nation’s overall financial future. The current path is unsustainable; bold and comprehensive reforms are imperative to avert a deepening fiscal crisis.
