Congress Must Trim Health-Care Subsidies and Consider Reforms

The federal government has been shut down for over two weeks because of the issue of health-care subsidies, but this problem has been festering for decades. From Medicare and Medicaid to the Affordable Care Act (also known as Obamacare), politicians have sought to transfer a greater share of health-care expenses to taxpayers.

And they’ve succeeded. The question is how long these subsidies can continue to grow without endangering the fisc or inciting a taxpayer revolt.

Last year, the federal government spent almost $2 trillion on health-care programs—more than twice the size of the defense budget and several times what was spent on any other sector. More than 40 cents of every dollar the federal government collected in taxes went to health care.

In 1962, prior to the advent of Medicare and Medicaid, the federal government spent $2.3 billion on health programs—about 2 cents of every dollar collected in taxes. As a share of the economy, federal health-care spending has grown from 0.4% of GDP in 1962 to 6.9% in 2024.

This spending has grown mainly because of Medicare and Medicaid expansions and those programs’ ever-increasing benefits and eligibility. But an aging population, rising income, and the soaring cost of simply going to the doctor also have contributed. Health-care spending from all sources, including state and local governments and private spending, has grown from about 5% of GDP in 1962 to 18% as of 2024, while the federal government’s share of that spending has grown from about 7% to more than 38%.

Although Medicare and Medicaid continue to make up the bulk of the spending, the two fastest-growing programs are veterans’ medical care and health insurance assistance—the latter consisting mainly of premium tax credits that apply to insurance purchased on Obamacare exchanges. Veterans’ medical care grew from $91 billion in 2020 to $138 billion in 2024. Health insurance assistance more than doubled from $52 billion in 2020 to $110 billion in 2024 after the Biden administration boosted Obamacare.

On top of these subsidies—which likely are understated, as they only account for outlay effects and not tax effects—it’s shocking that the health-care sector is the most favored sector in the tax code. Last year alone, preferences such as the exclusion for employer-sponsored health insurance and health savings accounts reduced federal revenue by about $465 billion or 1.6% of GDP, according to the Treasury Department.

All told, the fiscal cost of federal health-care subsidies in the form of spending and tax preferences was about $2.4 trillion or 8.5% of GDP last year—considerably larger than the entire deficit. These subsidies also amounted to more than 47% of all health-care spending from all sources.

The future of health-care subsidies looks much like the past, if it can be sustained. Under current law, health-care subsidies will grow to about 9.4% of GDP by 2034.

If Democrats succeed in extending enhanced Obamacare tax credits and unwinding reforms made under the recent tax-and-spending package—which is at the center of the current shutdown debate—federal health-care subsidies could top 10% of GDP within a decade and cover about half of all health-care spending from all sources.

All these subsidies have resulted in the worst of both worlds. Basic health care has become unaffordable. Over the last 25 years, the cost of employer-sponsored health insurance, which covers most workers, has grown faster than workers’ wages and inflation, with average premiums reaching $25,572 for family coverage last year, according to KFF.

Part of the problem is that about 25% of health-care spending is wasted, due in part to inefficiencies, bad incentives, and excessive demand created by Obamacare and other government programs.

Many reforms have been proposed that would reduce spending by several trillion dollars over the next decade. If Congress is serious about solving our health-care problems, the debate should start here.

Some proposals build on the new tax law’s reforms, including capping federal spending on Medicaid, limiting state taxes on health-care providers, reducing federal Medicaid matching rates, increasing premiums paid for Medicare, requiring site-neutral payments, and streamlining Obamacare. Reforming tax expenditures, such as the exclusion for employer-sponsored health insurance, would produce additional savings and efficiencies.

Health-care subsidies have become a major threat to the nation’s fiscal and economic health. Rather than simply boosting subsidies once again, lawmakers should agree to reopen the government, stop the bleeding by capping subsidy growth, and institute reforms that might finally bend the cost curve in health care downward.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

William McBride is the chief economist and Stephen J. Entin Fellow in Economics at the Tax Foundation.

Write for Us: Author Guidelines