The current federal government shutdown stems primarily from a fiscal battle over spiraling healthcare costs and the enormous federal subsidies propping up the sector. At the heart of the standoff is the potential, and costly, extension of certain Affordable Care Act (ACA) premium tax credit (PTC) enhancements.
If made permanent, these enhancements are projected to cost around $350 billion over the next decade, according to the Congressional Budget Office (CBO). However, these credits are just one component of a massive system, making healthcare the most heavily subsidized sector in the U.S. economy. Federal healthcare spending, combined with tax preferences, now surpasses $2 trillion—or 8 percent of GDP—and accounts for nearly a third of the federal budget. This trajectory is financially unsustainable and necessitates significant reform.
Healthcare’s Dominance in Federal Spending
Healthcare has become the single largest expense in the federal budget, dwarfing spending on national defense and other major sectors.
- $1.98 trillion: Federal spending on healthcare in 2024.
- 29.4%: Healthcare’s share of the total federal budget in 2024.
- 33.8%: Healthcare’s share of non-interest federal spending in 2024.
- More than double the defense budget: The $1.98 trillion spent on health care is more than twice the $874 billion defense budget (excluding the Defense Health Program).
Major programs like Medicare and Medicaid are the largest drivers of this expenditure, along with veterans’ medical care and ACA insurance assistance (PTCs).
Historical Growth
Federal healthcare spending has surged dramatically since the introduction of Medicare and Medicaid in the 1960s:
Overall U.S. healthcare spending (from all sources) has climbed from 5% of GDP in 1962 to 18% of GDP in 2024. The federal government’s share of that national health spending has ballooned from 7% to over 38%.
Premium Tax Credit (PTC) Cost Surge
The cost of federal health insurance assistance, mainly PTCs, has more than doubled since the pandemic, rising from $52 billion in 2020 to $110 billion in 2024. This increase followed enhancements in the American Rescue Plan Act of 2021 and their subsequent extension via the Inflation Reduction Act of 2022. These changes lowered the required premium contribution for eligible enrollees and expanded eligibility to higher-income individuals (above 400% of the poverty level).
Tax Preferences Compound the Fiscal Strain
Beyond direct spending, the federal tax code provides several substantial tax preferences (tax expenditures) for health care, which effectively act as additional subsidies by reducing tax revenue.
The exclusion for Employer-Sponsored Health Insurance (ESI) premiums is by far the largest single health-related tax break. When health-sector tax expenditures ($465 billion) are combined with direct federal healthcare spending (over $1.98 trillion), the total fiscal cost of federal healthcare subsidies exceeded $2.4 trillion in 2024, amounting to over 47% of all U.S. healthcare spending.
The Unsustainable Path and Reform Options
Federal healthcare spending has consistently grown faster than the economy. However, the recent passage of the One Big Beautiful Bill Act (OBBBA)—which tightened rules and reduced eligibility for Medicaid and PTCs—is projected to slow this growth, saving an estimated $1.1 trillion over the next decade if the ACA enhancements are not extended.
Despite this, the total fiscal cost of federal healthcare subsidies is still projected to rise from 8.5% of GDP in 2024 to 9.4% of GDP by 2034.
This growth comes at a time of severe fiscal stress:
- Interest costs on federal debt are projected to reach an all-time high of $1 trillion this year and exceed 4% of GDP by 2034.
- The primary deficit is set to rise above 3% over the next decade.
Pathways to Cost Control
To achieve a sustainable fiscal trajectory, policymakers must consider reforms that “bend the cost curve” downward.
- Limiting Tax Expenditures: Capping the income tax exclusion for expensive ESI plans could raise up to $389 billion over the next decade.
- Reforming Major Programs: The CBO has estimated options to reduce Medicare and Medicaid spending that could save more than $4 trillion over ten years. These include:
- Capping federal spending on Medicaid.
- Increasing Medicare premiums.
- Requiring site-neutral payments (paying the same amount for the same service regardless of the setting).
- Building on OBBBA reforms and streamlining ACA provisions to reduce waste and inefficiency.
Instead of continuously subsidizing inefficient programs, the current fiscal impasse should serve as an opportunity for lawmakers to implement structural reforms that prioritize efficiency and cost control.