The federal government’s long-term financial trajectory is facing severe pressure, driven in large part by a decades-long pattern of growing subsidies and tax preferences for the healthcare sector. According to projections from the Congressional Budget Office (CBO), current fiscal policies will push federal deficits and national debt to unprecedented levels, with healthcare spending and tax carveouts acting as the primary catalysts for the imbalance.
Under current law, budget deficits as a share of Gross Domestic Product (GDP) are projected to climb from 5.8 percent in 2026 to 6.7 percent by 2036. These figures represent the largest sustained deficits in the history of the United States. Furthermore, projections indicate that deficits will continue to swell, reaching 9.1 percent of GDP by 2056. Meanwhile, debt held by the public is on pace to eclipse 100 percent of GDP in 2026, climb to a record 106 percent within the next four years, and expand further to 120 percent by 2036 and 175 percent by 2056.
These growing imbalances are the direct result of federal spending growth outpacing both economic expansion and revenue generation. The CBO’s latest data shows that total federal spending will increase from 23.3 percent of GDP in 2026 to 24.4 percent in 2036, eventually hitting 27.9 percent by 2056. This far exceeds the 50-year historical average spending level of 21.1 percent. In comparison, federal revenues are projected to grow much more slowly, moving from 17.5 percent of GDP in 2026 to 17.8 percent in 2036 and 18.8 percent by 2056.
Federal Budget Increasingly Dominated by Healthcare Spending
Within the federal budget, the largest and most rapidly expanding category of expenditures consists of major healthcare programs. These include Medicare, Medicaid, Affordable Care Act (ACA) subsidies, and the Children’s Health Insurance Program (CHIP). When accounting for smaller healthcare initiatives distributed across various federal agencies, total federal healthcare spending now consumes nearly one-third of the entire federal budget.
Data from the Office of Management and Budget (OMB) indicates that federal healthcare spending vastly overshadows national defense and any other single category of public investment. In 2025, the federal government allocated $2.18 trillion toward health care. This expenditure accounted for 31.2 percent of the federal budget and 7.2 percent of GDP. When excluding net interest payments, healthcare programs comprised more than one-third—specifically 36.2 percent—of non-interest federal spending last year. To put that in perspective, healthcare outlays were more than double the size of the national defense budget, which stood at $855 billion in 2025, or 12.2 percent of the federal budget, excluding the Defense Health Program.
By comparison, other sector-specific federal investments remain relatively modest. Agriculture and food assistance totaled $197 billion, or 2.8 percent of the budget, in 2025. Transportation spending accounted for $145 billion, or 2.1 percent; education and training reached $88 billion, or 1.3 percent; housing programs stood at $78 billion, or 1.1 percent; and energy outlays totaled $21 billion, or 0.3 percent.
The historical trajectory of federal healthcare spending reveals an extraordinary expansion over the past several decades. Prior to the establishment of Medicare and Medicaid in the 1960s, federal spending on health programs was minimal. In 1962, the federal government spent just $2.3 billion on health, representing about 2.1 percent of the budget and roughly 0.4 percent of GDP. At that time, total healthcare spending from all sources—including state and local governments as well as private expenditures—stood at 5.4 percent of GDP, with the federal share representing just 7.2 percent of that total.
Over the ensuing decades, overall healthcare spending across the nation surged to 18.4 percent of GDP by 2025, while the federal government’s share of that broader spending grew to 39.3 percent. This growth has been propelled by policy expansions, an aging national demographic, rising personal incomes, and persistently escalating healthcare costs.
In 2025, net Medicare spending approached $1.0 trillion, accounting for nearly 3.3 percent of GDP. Medicaid outlays surpassed $668 billion, or 2.2 percent of GDP. Veterans’ medical care followed as the next largest category, costing over $148 billion, or roughly 0.5 percent of GDP. Health insurance assistance, primarily driven by Affordable Care Act premium tax credits (PTCs), added $129 billion, or about 0.4 percent of GDP, to the ledger in 2025. Although administered through the Internal Revenue Service, the federal government classifies roughly 90 percent of PTC costs as direct spending outlays because the refundable portions frequently exceed individual tax liabilities.
The cost of federal health insurance assistance has more than doubled since the onset of the COVID-19 pandemic, rising from $52 billion in 2020 to $129 billion in 2025. This escalation followed temporary enhancements to premium tax credits 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 temporary enhancements reduced the maximum premium contributions required from eligible enrollees on ACA exchanges and expanded eligibility to individuals with incomes exceeding 400 percent of the federal poverty level.
Additional health programs accounted for $242 billion, or 0.8 percent of GDP, in 2025. This category includes the Defense Health Program, which grew steadily from $53 billion in 2020 to $61 billion in 2025, alongside various smaller pandemic-era health programs that initially surged to $238 billion in 2020 before receding to $181 billion by 2025.
Fiscal Cost Compounded by Tax Preferences for Health Care
In addition to direct budget outlays, the federal tax code provides substantial tax preferences that heavily favor the healthcare sector. According to the U.S. Treasury Department and the Joint Committee on Taxation, health care receives a disproportionate share of federal tax expenditures, which measure the revenue losses resulting from credits, deductions, exclusions, and specialized carveouts.
By far the largest healthcare tax preference is the exclusion for employer-sponsored health insurance (ESI) premiums. In 2025, this single provision reduced federal income tax revenue by $279 billion and federal payroll tax revenue by $171 billion. Additional health tax preferences—including health savings accounts, the deductibility of medical expenses, charitable contributions to health institutions, and self-employed medical insurance premiums—cost an estimated $50 billion in 2025. Premium tax credits also reduced income tax revenues by roughly $12 billion, bringing Treasury’s baseline estimate for official health sector tax expenditures to $512 billion for the year. This figure excludes the tax exemption enjoyed by nonprofit hospitals, which was valued at approximately $12 billion as of 2021. In total, official health tax expenditures now equal about 9 percent of all U.S. healthcare spending from all sources.
When evaluated against the broader federal tax code, health care emerges as the most heavily favored sector. Treasury’s $512 billion estimate accounts for roughly 26 percent of all tax expenditures, which are projected to total about $2 trillion in 2025. By comparison, tax expenditures for housing stood at $309 billion, or 16 percent of the tax expenditure budget; education and training totaled $111 billion, or 6 percent; and energy preferences amounted to $64 billion, or 3 percent.
Economists note that a significant portion of official tax expenditures—roughly 40 percent by dollar amount—consist of structural provisions that move the tax code closer to neutrality regarding savings and consumption, such as individual retirement accounts and capital investment expensing. These provisions mitigate the double taxation of savings inherent in a traditional income tax. When removing these neutral provisions, Treasury’s non-neutral tax expenditures total $1.2 trillion for 2025. Within that adjusted framework, health care claims $512 billion, or 43 percent, of all remaining non-neutral preferences. By comparison, non-neutral housing preferences totaled $154 billion, education and training stood at $111 billion, and energy provisions accounted for $63 billion.
Combined with direct federal healthcare spending, the total fiscal cost of federal healthcare subsidies and tax preferences reached nearly $2.7 trillion in 2025. This equates to 8.9 percent of GDP and represents 48.5 percent of all U.S. healthcare spending from all sources.
Healthcare Subsidies Projected to Continue Growing Under Current Law
Federal healthcare spending has traced a remarkably steady upward trend over the past six decades, increasing by an average of slightly more than one percentage point of GDP per decade. While this expansion trajectory continued for years, recent legislative actions and administrative decisions have introduced modest headwinds. Congress previously enacted measures that tightened eligibility rules and reduced spending growth for Medicaid and premium tax credits, while the Trump administration and lawmakers allowed the expanded ACA subsidies to expire at the end of 2025.
Additionally, the administration opted against extending temporary federal subsidies for Medicare Part D prescription drug plans. Analysts suggest, however, that any savings generated by ending these temporary measures could be partially offset by unanticipated long-term growth in Medicare Part D spending stemming from prior structural changes under the Inflation Reduction Act.
Despite these recent policy adjustments, the long-term federal spending trajectory remains upward. Based on current-law projections from the CBO—which assume that temporary PTC enhancements are not revived—federal healthcare spending is projected to rise from 7.2 percent of GDP in 2025 to approximately 7.8 percent by 2035. Concurrently, healthcare tax expenditures are projected to grow from 1.7 percent of GDP to about 1.9 percent over the same decade, while health care’s share of non-neutral tax expenditures is set to rise from 43 percent to nearly 49 percent. Combined, the total fiscal cost of federal healthcare subsidies and tax preferences is projected to climb from 8.9 percent of GDP in 2025 to roughly 9.7 percent by 2035.
How Sustainable Are Healthcare Subsidies and What Options Are There for Reform?
As policymakers grapple with competing priorities such as healthcare affordability, access, and clinical quality, fiscal analysts emphasize that the long-term sustainability of federal healthcare subsidies must remain a central consideration. Net interest costs on the national debt are projected to top $1 trillion, or 3.3 percent of GDP, before expanding further over the coming decade. At the same time, primary deficits—which exclude interest payments—are expected to average more than 2 percent of GDP, driving overall deficits to levels historically unseen during peacetime.
Independent analyses, including modeling conducted by the Tax Foundation, indicate that reforming the tax code offers substantial revenue potential. Eliminating the income tax exclusion for employer-sponsored health insurance would raise approximately $2.4 trillion over a decade on a dynamic basis, accounting for broader macroeconomic effects, while eliminating the payroll tax exclusion would raise roughly $1.6 trillion. However, budget experts point out that the spending side of the ledger offers significantly greater scope for fiscal savings through structural reforms to major programs like Medicare, Medicaid, and ACA insurance exchanges.
The CBO has outlined several potential legislative options to reduce outlays in Medicare and Medicaid, including capping federal Medicaid spending, restricting state-level provider taxes, lowering federal Medicaid matching rates, raising Medicare beneficiary premiums, and implementing site-neutral payment models. Economists argue that future reform efforts should prioritize reducing systemic waste, improving administrative efficiency, and encouraging broader market competition, innovation, and consumer choice to alter the long-term cost trajectory of the American healthcare system.
