Candice Horbacz
The federal government’s finances are on an increasingly unsustainable trajectory, largely propelled by a persistent pattern of expanding subsidies and tax preferences within the healthcare sector. This deepening fiscal crisis poses significant challenges to the nation’s long-term economic health, demanding immediate and comprehensive policy attention.
The Alarming Fiscal Trajectory
The Congressional Budget Office (CBO) paints a stark picture of the nation’s financial future. Under current law, deficits as a share of Gross Domestic Product (GDP) are projected to escalate from 5.8 percent in fiscal year 2026 to 6.7 percent by 2036. This trajectory would mark the largest sustained deficits in U.S. history, with projections indicating a further rise to 9.1 percent by 2056. The accumulation of public debt mirrors this alarming trend. Debt held by the public is forecast to surpass 100 percent of GDP in 2026, reaching a new record high of 106 percent within the subsequent four years. This ascent is expected to continue, reaching 120 percent by 2036 and a staggering 175 percent by 2056. These figures underscore a profound imbalance between federal spending and revenue.
The primary driver of these imbalances is the rapid growth in government spending, which consistently outpaces both economic expansion and tax revenues. The CBO’s latest analysis reveals that total federal spending is projected to climb from 23.3 percent of GDP in 2026 to 24.4 percent in 2036, eventually reaching 27.9 percent by 2056. This represents a significant deviation from the average spending level of 21.1 percent observed over the past five decades. Concurrently, revenues are anticipated to grow at a much slower pace, increasing from 17.5 percent of GDP in 2026 to 17.8 percent in 2036 and 18.8 percent in 2056. This widening gap between expenditures and income is unsustainable, placing immense pressure on future generations and potentially constraining the government’s ability to respond to future crises.
Healthcare: The Dominant Budgetary Force
Within the federal budget, major healthcare programs constitute the largest and most rapidly expanding category of spending. This includes foundational programs like Medicare, Medicaid, Affordable Care Act (ACA) subsidies, and the Children’s Health Insurance Program (CHIP). A comprehensive analysis reveals that total federal healthcare spending, encompassing smaller programs dispersed across various agencies, now accounts for nearly one-third of the entire federal budget.
According to the Office of Management and Budget (OMB), federal healthcare spending far exceeds expenditures on national defense or any other specific industry or spending category. 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. To put this in perspective, healthcare spending, including Medicare and Medicaid, comprised over one-third of non-interest federal spending (36.2 percent) and was more than double the size of the defense budget, which totaled $855 billion (excluding the Defense Health Program) or 12.2 percent of the federal budget in the same year.
Comparing healthcare spending to other sector-specific allocations further highlights its dominance: agriculture and food assistance received $197 billion (2.8 percent of the budget), transportation $145 billion (2.1 percent), education and training $88 billion (1.3 percent), housing $78 billion (1.1 percent), and energy a mere $21 billion (0.3 percent). These figures underscore the overwhelming fiscal footprint of healthcare in federal expenditures.
A Historical Perspective on Healthcare Spending Growth
The dramatic surge in federal healthcare spending is not a recent phenomenon but the culmination of several decades of policy choices and demographic shifts. In 1962, prior to the establishment of Medicare and Medicaid, federal outlays for health programs totaled a modest $2.3 billion, representing about 2.1 percent of the budget and a mere 0.4 percent of GDP. At that time, overall healthcare spending from all sources—federal, state, local governments, and private spending—accounted for 5.4 percent of GDP, with the federal government’s share being only 7.2 percent.
The advent of Medicare and Medicaid in the 1960s marked a pivotal shift, significantly expanding benefits and eligibility for millions of Americans. Since then, overall national healthcare spending has soared to 18.4 percent of GDP as of 2025, with the federal share of that spending dramatically increasing to 39.3 percent. This long-term growth has been driven by a confluence of factors, including an aging population, rising incomes leading to increased demand for healthcare services, and persistent escalation of healthcare costs, fueled by technological advancements, administrative complexities, and provider market dynamics.
Key Drivers of Contemporary Healthcare Spending
As of 2025, Medicare spending, net of premiums, reached nearly $996 billion, or 3.3 percent of GDP. Medicaid expenditures surpassed $668 billion, accounting for 2.2 percent of GDP. Beyond these two behemoths, veterans’ medical care represents another significant cost, exceeding $148 billion (approximately 0.5 percent of GDP).
Health insurance assistance, primarily comprising Affordable Care Act (ACA) premium tax credits (PTCs), added another $129 billion, or about 0.4 percent of GDP, in 2025. It is important to note that while administered through the IRS, approximately 90 percent of the cost of PTCs is categorized as outlays (spending) due to their refundable nature, which can exceed a taxpayer’s liability. The cost of federal health insurance assistance has more than doubled since the pandemic, rising from $52 billion in 2020 to $129 billion in 2025. This surge followed enhancements to PTCs enacted under 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 reduced the maximum premium contribution required from eligible enrollees and expanded eligibility to individuals with incomes exceeding 400 percent of the poverty level.
Other health programs, totaling $242 billion (0.8 percent of GDP) in 2025, include the Defense Health Program, which has seen steady growth from $53 billion in 2020 to $61 billion in 2025, and various smaller initiatives that received substantial, albeit temporary, funding surges during the pandemic, peaking at $238 billion in 2020 before receding to $181 billion in 2025.
The Hidden Costs: Federal Tax Preferences for Healthcare
Beyond direct spending, the federal tax code provides substantial, often overlooked, tax preferences for the healthcare sector, further compounding its fiscal impact. These "tax expenditures" represent foregone government revenue due to credits, deductions, exclusions, and other special carveouts.
The largest of these preferences, according to the U.S. Treasury Department and the Joint Committee on Taxation, is the exclusion for employer-sponsored health insurance (ESI) premiums. This exclusion significantly reduces federal income tax revenue by an estimated $279 billion and federal payroll tax revenue by $171 billion in 2025 alone. Other major health tax preferences include health savings accounts, the deductibility of medical expenses, charitable contributions to health institutions, and self-employed medical insurance premiums, collectively costing approximately $50 billion in 2025.
Treasury’s overall estimate for health sector tax expenditures totaled $512 billion in 2025. This figure, however, does not fully capture all benefits, such as the tax exemption for hospitals, which was estimated to cost about $12 billion in 2021. In total, these health tax expenditures account for roughly 9 percent of all U.S. healthcare spending from all sources.
These preferences render health care the most favored sector in the tax code. The $512 billion allocated to healthcare represents about 26 percent of all tax expenditures, which are projected to total approximately $2 trillion in 2025. For comparison, tax expenditures for housing amounted to $309 billion (16 percent), education and training $111 billion (6 percent), and energy $64 billion (3 percent) in 2025.
When considering only "non-neutral" tax expenditures—those that depart from a truly neutral tax code and act as direct subsidies—the healthcare sector’s dominance becomes even more pronounced. Excluding provisions that broadly align the tax code with consumption tax principles (e.g., individual retirement accounts, expensing for capital investment), the remaining non-neutral tax expenditures totaled $1.2 trillion in 2025. Of this, the health sector’s $512 billion accounts for a staggering 43 percent, indicating a disproportionate allocation of preferential tax treatment. In contrast, non-neutral tax expenditures for housing were $154 billion (13 percent), education and training $111 billion (9 percent), and energy $63 billion (5 percent).
Historically, while the fiscal cost of federal healthcare tax preferences has grown, it has done so at a slower rate than direct federal healthcare spending. As a share of GDP, these preferences increased from 1.4 percent in 1994 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 significantly, from 29 percent in 1994 to 43 percent in 2025.
The Combined Fiscal Burden and its Implications
When combining federal healthcare spending with tax expenditures, the total fiscal cost of federal healthcare subsidies and carveouts reached nearly $2.7 trillion in 2025, representing 8.9 percent of GDP. This massive sum equates to 48.5 percent of all U.S. healthcare spending from all sources, highlighting the federal government’s increasingly dominant role in financing the nation’s healthcare system through both direct outlays and indirect tax breaks. Some alternative analyses, including state and local government contributions, suggest that the total government share of U.S. healthcare spending could be as high as two-thirds.
This extensive federal involvement creates significant economic distortions. The exclusion for ESI, for instance, incentivizes employers to divert compensation towards tax-free health benefits rather than taxable cash wages, impacting labor market dynamics. It also favors costly, employment-tied insurance over more portable coverage or direct payments to providers, potentially limiting consumer choice and competition. This picking of "winners and losers" on such a grand scale raises concerns about market neutrality and efficient resource allocation.
Policy Milestones and Future Projections
Federal healthcare spending as a share of GDP has followed a remarkably consistent upward trend, increasing by slightly more than one percentage point per decade over the last six decades. While some recent legislative efforts, such as the hypothetical "One Big Beautiful Bill Act (OBBBA)" which tightened Medicaid and PTC eligibility, and the expiration of more generous ACA subsidies in 2025, aimed to temper this growth, the overall trajectory remains upward. Even the Trump administration’s denial of an extension for Medicare Part D prescription drug plan subsidies, while potentially offering savings, could be offset by unanticipated spending growth elsewhere, especially following changes introduced by the Inflation Reduction Act of 2022. The inherent complexity of the health sector makes precise projections challenging.
Nevertheless, based on the CBO’s current law projections—which notably assume the non-extension of PTC enhancements—the OBBBA is estimated to reduce federal healthcare spending by approximately $1 trillion over the next decade. This would slow growth in these programs to about half the historical rate, leading to an increase from 7.2 percent of GDP in 2025 to roughly 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 rising from 43 percent to over 49 percent in the same period. Cumulatively, the total fiscal cost of federal healthcare subsidies and carveouts is set to increase from 8.9 percent of GDP in 2025 to approximately 9.7 percent of GDP by 2035.
The Path Forward: Calls for Reform and Sustainable Solutions
Addressing the sustainability of federal healthcare subsidies is a critical imperative for lawmakers, alongside other important goals like improving affordability, access, and quality of care. The rising interest costs on the federal debt, projected to exceed $1 trillion (3.3 percent of GDP) this fiscal year and grow beyond 4.5 percent of GDP over the next decade, underscore the urgency. The primary deficit, excluding interest costs, is expected to average over 2 percent for the next decade, pushing total deficits to levels unprecedented in peacetime.
Analysts and fiscal responsibility advocates consistently highlight the need for comprehensive reforms. Options for revenue generation include capping or eliminating the exclusion for employer-sponsored health insurance. The Tax Foundation estimates that eliminating the income tax exclusion alone could raise approximately $2.4 trillion over the next decade (dynamically), with the payroll tax exclusion generating another $1.6 trillion.
However, the spending side offers even greater potential for savings. The CBO has identified numerous options to reduce Medicare and Medicaid expenditures, potentially saving trillions of dollars. These reforms could build on existing efforts, including capping federal Medicaid spending, limiting state taxes on healthcare providers, reducing federal Medicaid matching rates, increasing Medicare premiums, and implementing site-neutral payments.
Beyond specific program adjustments, a broader consensus among economists and policy experts emphasizes the need for fundamental market reforms. The current system, heavily subsidized and characterized by limited competition, often incentivizes higher costs rather than efficiency. Policymakers face the challenge of designing reforms that reduce waste, improve efficiency, and ease cost pressures without compromising access or quality. This necessitates a shift away from merely subsidizing inefficient programs towards instituting market-based solutions that foster competition, innovation, and greater consumer choice, ultimately aiming to "bend the cost curve" downward. This includes exploring mechanisms that empower consumers with more transparent pricing information and greater control over their healthcare dollars, thereby introducing stronger market forces into a sector currently dominated by third-party payers and complex regulatory structures. Without such reforms, the ever-growing fiscal burden of healthcare threatens to destabilize the entire federal budget, impacting national priorities for decades to come.
