Main Facts
The United States federal government is standing on an unsustainable fiscal precipice, driven predominantly by a decades-long expansion of healthcare spending and generous tax preferences. According to recent projections from the Congressional Budget Office (CBO), federal budget deficits are set to rise from 5.8 percent of Gross Domestic Product (GDP) in 2026 to 6.7 percent by 2036. This trajectory represents the largest and most prolonged era of peacetime deficits in American history, with shortfalls expected to climb even further to 9.1 percent by 2056.
Simultaneously, debt held by the public is on track to shatter historical records. Having breached 100 percent of GDP in 2026, public debt is projected to hit 106 percent within four years, escalate to 120 percent by 2036, and reach a staggering 175 percent by mid-century.
At the heart of this fiscal imbalance is a structural mismatch between government revenues and expenditures. While federal revenues are projected to crawl upward from 17.5 percent of GDP in 2026 to 18.8 percent by 2056, spending is outpacing economic growth. Total outlays, which averaged 21.1 percent of GDP over the last half-century, are projected to jump from 23.3 percent in 2026 to 24.4 percent in 2036, and reach 27.9 percent by 2056.
By far the largest and fastest-growing category fueling this spending surge is healthcare. Major federal health programs—including Medicare, Medicaid, Affordable Care Act (ACA) subsidies, and the Children’s Health Insurance Program (CHIP)—now claim nearly one-third of the entire federal budget. When combined with federal tax expenditures, such as the massive tax exclusion for employer-sponsored health insurance (ESI), the total fiscal cost of federal healthcare interventions reached nearly $2.7 trillion in 2025, or 8.9 percent of GDP. This means the federal government financially supports or directly funnels nearly half of all healthcare spending nationwide.
Chronology: A History of Expansion
To understand how federal healthcare spending became the dominant force in the U.S. budget, it is necessary to examine the historical trajectory of health policy over the last six decades.
Pre-Medicare Era (Early 1960s)
Before the landmark legislative enactments of the mid-1960s, the federal footprint in American healthcare was minimal. In fiscal year 1962, the federal government spent a mere $2.3 billion on health programs—accounting for roughly 2.1 percent of the federal budget and a negligible 0.4 percent of GDP. At that time, total national healthcare spending (spanning state, local, and private sources) stood at 5.4 percent of GDP, with the federal share representing just 7.2 percent of that total.
The Great Society and Program Expansion
The landscape shifted dramatically with the enactment of Medicare and Medicaid in 1965 under President Lyndon B. Johnson’s Great Society initiative. These programs established permanent entitlements designed to protect elderly and low-income populations from catastrophic medical expenses. Over the subsequent decades, incremental policy changes steadily broadened eligibility requirements, expanded covered benefits, and integrated advanced medical technologies.
Concurrently, demographic shifts—most notably the aging of the Baby Boomer generation—alongside rising national income and skyrocketing medical inflation, created a powerful compounding effect on federal expenditures. By the turn of the 21st century, federal healthcare spending had evolved from a minor administrative line item into one of the largest obligations of the state.
The Affordable Care Act and Post-Pandemic Surges
The passage of the Affordable Care Act in 2010 introduced new tiers of federal health insurance assistance through premium tax credits (PTCs) and Medicaid expansion. These mechanisms expanded coverage to millions of previously uninsured Americans.
However, the fiscal exposure of the federal government exploded during the COVID-19 pandemic. The American Rescue Plan Act of 2021 temporarily enhanced PTCs by lowering the maximum premium contributions required from enrollees and extending eligibility above the historical 400 percent poverty-level cap. These temporary enhancements were subsequently extended through the end of 2025 via the Inflation Reduction Act of 2022. Consequently, federal health insurance assistance costs more than doubled, soaring from $52 billion in fiscal year 2020 to $129 billion by 2025.
Supporting Data: Where the Money Goes
Data compiled from the Office of Management and Budget (OMB), the Department of the Treasury, and the CBO paint a stark picture of a budget thoroughly dominated by medical outlays.
Federal Outlays by Sector
In fiscal year 2025, the federal government expended $2.18 trillion on healthcare programs. This accounted for:
- 31.2 percent of the entire federal budget.
- 7.2 percent of U.S. GDP.
- 36.2 percent of non-interest federal spending.
To put this in perspective, federal healthcare spending in 2025 was more than double the size of the national defense budget, which stood at $855 billion (12.2 percent of the federal budget, excluding the Defense Health Program). By comparison, other major federal responsibilities received drastically smaller shares: agriculture and food assistance claimed 2.8 percent ($197 billion), transportation accounted for 2.1 percent ($145 billion), education and training took 1.3 percent ($88 billion), housing absorbed 1.1 percent ($78 billion), and energy received a mere 0.3 percent ($21 billion).
Breakdown of Major Health Programs (2025 Figures)
- Medicare (Net of Premiums): $996 billion (3.3 percent of GDP).
- Medicaid: $668 billion (2.2 percent of GDP).
- Defense Health Program: $61 billion.
- Veterans’ Medical Care: Over $148 billion (0.5 percent of GDP).
- ACA Premium Tax Credits: $129 billion (0.4 percent of GDP).
- Pandemic-Surge and Miscellaneous Health Programs: $181 billion down from a peak of $238 billion in 2020.
The Hidden Price Tag: Tax Preferences
In addition to direct appropriations, the federal tax code offers extensive tax preferences that favor the medical sector over all others. The Joint Committee on Taxation and the U.S. Treasury Department estimate that total health sector tax expenditures cost the federal government $512 billion annually as of 2025.
The crown jewel of these tax breaks is the exclusion for employer-sponsored health insurance (ESI) premiums. In 2025 alone, this single provision drained $279 billion in federal income tax revenue and $171 billion in payroll tax revenue. Other preferences—such as Health Savings Accounts (HSAs), medical expense deductions, and self-employed health insurance deductions—contributed an additional $50 billion.
When measured against the broader tax landscape, health preferences account for roughly 26 percent of all federal tax expenditures ($2 trillion total). By contrast, tax preferences for housing totaled $309 billion (16 percent), education and training reached $111 billion (6 percent), and energy stood at $64 billion (3 percent). Combined with direct programmatic spending, the total fiscal footprint of federal healthcare subsidies and tax carveouts reached nearly $2.7 trillion in 2025 (8.9 percent of GDP).
Official Responses and Policy Reforms
As national debt figures escalate, policymakers and fiscal watchdogs are increasingly grappling with the structural drivers of the deficit. Recent legislative actions have attempted to bend the spending curve downward, though significant challenges remain.
Legislative Interventions
Congress and the executive branch have begun rolling back some of the expansive subsidies enacted during the pandemic era. The passage of the One Big Beautiful Bill Act (OBBBA) instituted tighter administrative rules and restricted eligibility criteria for both Medicaid and ACA premium tax credits. Furthermore, the Trump administration permitted the generous, pandemic-era enhancements for ACA exchange plans to expire at the end of 2025. More recently, the administration moved to terminate temporary federal subsidies for Medicare Part D prescription drug plans, a step praised by fiscal conservatives aiming to curb runaway entitlements.
However, these savings may face offsets. Analysts note that unanticipated utilization growth within Medicare Part D—spurred by structural changes in the 2022 Inflation Reduction Act—introduces volatility into long-term federal health outlays.
CBO Projections Under Current Law
Despite recent curbs, the CBO projects that spending growth will persist. Factoring in the OBBBA and the expiration of temporary ACA enhancements, federal healthcare spending is projected to grow from 7.2 percent of GDP in 2025 to approximately 7.8 percent by 2035, while healthcare tax expenditures will edge up to 1.9 percent of GDP. Combined, total federal health subsidies and carveouts are slated to rise from 8.9 percent of GDP to 9.7 percent over the next decade.
Proposed Solutions from Fiscal Experts
Organizations like the Tax Foundation and the American Enterprise Institute have laid out aggressive options to reclaim fiscal control:
- Reforming Tax Exclusions: Phasing out or capping the income and payroll tax exclusions for employer-sponsored health insurance could unlock massive revenues. Dynamic modeling by the Tax Foundation suggests that eliminating the income tax exclusion would generate approximately $2.4 trillion over a decade, while stripping the payroll tax exclusion would yield roughly $1.6 trillion.
- Programmatic Spending Cuts: The CBO has outlined trillions in potential savings through structural changes to major entitlement programs. Recommended steps include capping federal matching rates for Medicaid, limiting state-level provider taxes, increasing Medicare beneficiary premiums, and enforcing site-neutral payments so that the government does not pay higher rates for routine medical procedures performed in hospital-owned outpatient facilities.
- Market-Based Innovations: Rather than doubling down on government subsidies that insulate consumers from true medical costs, fiscal analysts advocate for regulatory reforms that foster competition, consumer choice, and transparency to organically drive down healthcare inflation.
Implications for the American Economy
The ramifications of an unmitigated healthcare spending trajectory extend far beyond Washington ledger books, posing tangible threats to macroeconomic stability and labor market efficiency.
Crowding Out National Priorities
As mandatory healthcare spending and debt-service costs consume an ever-larger share of federal receipts, discretionary spending is steadily squeezed. With net interest payments on the national debt projected to exceed $1 trillion (3.3 percent of GDP) and climb toward 4.5 percent of GDP over the next decade, the federal government faces a future where funding for national security, infrastructure, scientific research, and education is heavily restricted.
Economic Distortions in the Labor Market
The heavy reliance on tax preferences—particularly the ESI exclusion—creates severe economic distortions. By heavily favoring employer-provided health plans over taxable cash wages or portable, individual insurance options, the tax code discourages labor mobility. Workers may remain tied to specific employers solely to maintain health coverage, while companies are nudged to over-compensate workers in the form of lavish, tax-free health benefits rather than productivity-enhancing wages.
The Sustainability Crisis
Ultimately, health policy in the United States has relied on subsidies and tax carveouts as a political shortcut to expand coverage without directly confronting the underlying drivers of medical inflation. As experts note, nearly a quarter of all U.S. healthcare spending is classified as wasteful or inefficient. Without decisive structural reforms to both federal entitlement spending and tax preferences, the nation risks entering a permanent fiscal crisis characterized by historic deficits, ballooning interest payments, and diminished economic dynamism.
