Federal spending on healthcare programs and tax breaks for health care now accounts for nearly one-third of the federal budget and is on track to keep growing faster than the overall economy, adding to long-term fiscal pressure on the United States.
Rising deficits and spending
The Congressional Budget Office (CBO) projects federal deficits will rise from 5.8 percent of GDP in fiscal year 2026 to 6.7 percent in 2036, and to 9.1 percent by 2056 — the largest sustained deficits in US history. Debt held by the public will exceed 100 percent of GDP in 2026, reach a record 106 percent within four years, and climb to 120 percent by 2036 and 175 percent by 2056.
Federal spending is projected to grow from 23.3 percent of GDP in 2026 to 24.4 percent in 2036 and 27.9 percent by 2056, well above the 50-year average of 21.1 percent. Revenues are projected to rise more slowly, from 17.5 percent of GDP in 2026 to 17.8 percent in 2036 and 18.8 percent in 2056.
The largest and fastest-growing spending category is major healthcare programs: Medicare, Medicaid, Affordable Care Act (ACA) subsidies, and the Children’s Health Insurance Program (CHIP).
Healthcare’s share of the federal budget
In 2025, the federal government spent $2.18 trillion on health care — 31.2 percent of the federal budget and 7.2 percent of GDP. That was more than one-third of non-interest federal spending (36.2 percent) and more than twice the size of the defense budget ($855 billion, or 12.2 percent of the budget, excluding the Defense Health Program).
By comparison, other sector spending in 2025 was much smaller:
- Agriculture and food assistance: $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)
- Energy: $21 billion (0.3 percent)
Federal healthcare spending has grown sharply since the 1960s, driven by the creation and expansion of Medicare and Medicaid, an aging population, rising incomes, and rising healthcare costs. In 1962, before Medicare and Medicaid existed, federal health spending was $2.3 billion — about 2.1 percent of the budget and 0.4 percent of GDP. At that time, total US healthcare spending (all sources) was 5.4 percent of GDP, with the federal government covering 7.2 percent of it. By 2025, total US healthcare spending had grown to 18.4 percent of GDP, with the federal share rising to 39.3 percent.
Breakdown of 2025 federal healthcare spending:
- Medicare: over $996 billion (net of premiums), about 3.3 percent of GDP
- Medicaid: over $668 billion, about 2.2 percent of GDP
- Veterans’ medical care: over $148 billion, about 0.5 percent of GDP
- Health insurance assistance (mainly ACA premium tax credits, or PTCs): $129 billion, about 0.4 percent of GDP
- Other health programs (including the Defense Health Program): $242 billion, about 0.8 percent of GDP
About 90 percent of the cost of PTCs is counted as federal spending rather than a tax reduction, because of the refundable portion exceeding tax liability.
The cost of federal health insurance assistance more than doubled since the pandemic, from $52 billion in 2020 to $129 billion in 2025, following PTC enhancements under the American Rescue Plan Act of 2021, later extended through the end of 2025 by the Inflation Reduction Act of 2022. Those enhancements reduced the maximum premium contribution required of eligible enrollees and extended eligibility to people with income above 400 percent of the poverty level.
The Defense Health Program grew from $53 billion in 2020 to $61 billion in 2025. Other pandemic-era health programs spiked to $238 billion in 2020 before falling to $181 billion in 2025.
Tax preferences add to the cost
Beyond direct spending, the tax code provides substantial preferences for health care. PTCs were the largest tax credit in the code in 2025, reducing income tax revenue by about $12 billion (separate from their outlay effect).
The largest healthcare tax preference by far is the exclusion for employer-sponsored health insurance (ESI) premiums, which reduced federal income tax revenue by $279 billion and payroll tax revenue by $171 billion in 2025. Other health tax preferences — health savings accounts, deductibility of medical expenses, deductibility of charitable contributions to health institutions, and deductibility of self-employed medical insurance premiums — cost about $50 billion combined.
In total, Treasury estimates health sector tax expenditures at $512 billion in 2025 (not counting the roughly $12 billion tax exemption for nonprofit hospitals, as of 2021). That is about 9 percent of all US healthcare spending from all sources, and about 26 percent of all US tax expenditures ($2 trillion in 2025) — making health care the most tax-favored sector in the economy. By comparison, tax expenditures for housing totaled $309 billion (16 percent), education and training $111 billion (6 percent), and energy $64 billion (3 percent).
About 40 percent of Treasury’s tax expenditures (by dollar amount) are provisions — such as IRA-style retirement accounts and capital investment expensing — that move the tax code toward neutrality on saving and investment decisions, and so aren’t considered subsidies. Excluding those, $1.2 trillion in “non-neutral” tax expenditures remained in 2025, of which $512 billion (43 percent) went to health care — none of official health tax expenditures are considered neutral. Non-neutral tax expenditures for housing totaled $154 billion (13 percent), education and training $111 billion (9 percent), and energy $63 billion (5 percent).
As a share of GDP, federal healthcare tax preferences rose from 1.4 percent in 1994 (earliest available data) to 1.7 percent in 2025, with about 90 percent of that coming from the ESI exclusion. Meanwhile, all other non-neutral tax expenditures shrank from 3.3 percent of GDP in 1994 to 2.3 percent in 2025 — with the largest drop following the 2017 Tax Cuts and Jobs Act. Health care’s share of all non-neutral tax expenditures grew from 29 percent in 1994 to 43 percent in 2025.
Combining tax expenditures and direct spending, the total fiscal cost of federal healthcare subsidies and carveouts reached nearly $2.7 trillion in 2025 — 8.9 percent of GDP and 48.5 percent of all US healthcare spending from all sources.
Outlook and reform options
Federal healthcare spending as a share of GDP has risen about one percentage point per decade on average over the last six decades. That trend is expected to slow somewhat following the One Big Beautiful Bill Act (OBBBA), which tightened eligibility rules for Medicaid and PTCs, and the expiration of more generous ACA subsidies in 2025. The Trump administration has also denied an extension of Medicare Part D prescription drug plan subsidies, though CBO notes any savings could be offset by unanticipated growth in Part D spending tied to Inflation Reduction Act changes.
Under current law — which assumes PTC enhancements are not extended — CBO projects the OBBBA will reduce federal healthcare spending by about $1 trillion over the next decade, cutting the growth rate roughly in half. Healthcare spending is projected to rise from 7.2 percent of GDP in 2025 to about 7.8 percent in 2035. Healthcare tax expenditures are projected to grow from 1.7 percent of GDP in 2025 to about 1.9 percent in 2035, with health care’s share of non-neutral tax expenditures rising from 43 percent to more than 49 percent. Combined, the total fiscal cost of federal healthcare subsidies and carveouts is projected to rise from 8.9 percent of GDP in 2025 to about 9.7 percent by 2035.
Interest costs on federal debt are projected to hit an all-time high of more than $1 trillion (3.3 percent of GDP) this fiscal year, rising above 4.5 percent of GDP within a decade. The primary deficit (excluding interest) is projected to average more than 2 percent of GDP over the next decade.
Proposed reform options include:
- Eliminating the income tax exclusion for ESI, estimated to raise about $2.4 trillion over the next decade (dynamic basis)
- Eliminating the payroll tax exclusion for ESI, estimated to raise about $1.6 trillion
- Capping federal Medicaid spending
- Limiting state taxes on healthcare providers
- Reducing federal Medicaid matching rates
- Increasing Medicare premiums
- Requiring site-neutral payments
Spending-side reforms to Medicare, Medicaid, and the ACA exchanges are seen as offering far greater potential savings than limiting tax expenditures alone.
Source article: taxfoundation.org
