The federal government's combined spending and tax breaks for healthcare reached nearly $2.7 trillion in 2025, or 8.9 percent of GDP, according to a report published by the Tax Foundation. That total reflects both direct federal healthcare spending of $2.18 trillion and more than $500 billion in annual tax preferences for the health sector, making it the most heavily tax-favored part of the economy. Through fiscal measures alone, the federal government now controls nearly half of all national health spending, with 48.5 percent flowing through federal programs or tax carveouts.
Healthcare spending has become the largest category in the federal budget, consuming 31.2 percent of all federal outlays in 2025 and exceeding 36 percent of non-interest spending. That's more than double the defense budget, which totaled $855 billion last year. Medicare alone reached $996 billion in 2025, while Medicaid surpassed $668 billion. Veterans' medical care cost over $148 billion, and health insurance assistance—primarily Affordable Care Act premium tax credits—hit $129 billion, more than doubling from $52 billion in 2020 following pandemic-era enhancements. The exclusion for employer-sponsored health insurance reduced federal income tax revenue by $279 billion and payroll tax revenue by $171 billion in 2025. Healthcare's share of all non-neutral tax expenditures has grown from 29 percent in 1994 to 43 percent in 2025, even as other tax breaks have shrunk as a share of GDP.
The report finds that federal healthcare costs are projected to keep growing faster than the overall economy, rising to about 9.7 percent of GDP by 2035 despite recent reforms. According to the authors, the One Big Beautiful Bill Act will reduce federal healthcare spending by about $1 trillion over the next decade by tightening Medicaid rules and allowing enhanced ACA subsidies to expire, slowing growth to roughly half the historical rate. Still, healthcare spending will climb from 7.2 percent of GDP in 2025 to about 7.8 percent in 2035, while healthcare tax expenditures rise from 1.7 percent to 1.9 percent of GDP. The report notes that health care's share of non-neutral tax expenditures is set to increase from 43 percent in 2025 to more than 49 percent in 2035.
The rapid growth in healthcare subsidies stems from decades of program expansions, an aging population, rising incomes, and increasing healthcare costs, the report explains. Back in 1962, before Medicare and Medicaid existed, the federal government spent just $2.3 billion on health programs—about 2.1 percent of the budget and 0.4 percent of GDP. At that time, the federal share of total national health spending was only 7.2 percent. Since then, overall healthcare spending has ballooned to 18.4 percent of GDP, and Washington's portion has grown to 39.3 percent. The exclusion for employer-sponsored insurance distorts both labor and healthcare markets, the authors write, by pushing employers to offer tax-free health benefits instead of taxable wages and favoring costly insurance tied to jobs rather than portable coverage. Meanwhile, interest costs on the federal debt are projected to reach $1 trillion this fiscal year before growing to more than 4.5 percent of GDP over the next decade, far above historical peacetime levels.
The report recommends market-based reforms to control costs, including eliminating the employer-sponsored insurance exclusion, which would raise about $2.4 trillion over the next decade by ending the income tax break and another $1.6 trillion by ending the payroll tax break. Other options include capping federal Medicaid spending, limiting state taxes on healthcare providers, reducing federal Medicaid matching rates, increasing Medicare premiums, and requiring site-neutral payments. Rather than continuing to subsidize inefficient programs, the authors conclude, lawmakers should allow more competition, innovation, and consumer choice to finally bend the healthcare cost curve downward.