The Unaffordable Healthcare Subsidies That Led to a Government Shutdown

https://taxfoundation.org/blog/unaffordable-healthcare-subsidies-
government-shutdown/

The fiscal fight that resulted in the current federal government shutdown 
is, at its core, about the healthcare sector, spiraling healthcare costs, 
and federal subsidies. The main focus is the end-of-year expiration of 
enhancements to the Affordable Care Act premium tax credits (PTCs), which, 
if extended permanently, would cost about $350 billion over the next 
decade, according to the Congressional Budget Office (CBO).

However, PTCs are but one of many federal subsidies and tax preferences 
for health care, making this sector by far the most heavily government-
subsidized sector in the economy. Healthcare spending has grown to almost 
one-third of the federal budget and, combined with tax preferences, now 
exceeds $2 trillion or 8 percent of GDP. These subsidies are forecasted to 
continue growing faster than the overall economy, making reforms that 
control costs imperative to achieve a sustainable fiscal trajectory.

Federal Budget Increasingly Dominated by Healthcare Spending
Federal healthcare spending far exceeds spending on national defense or 
any other industry, according to the latest data from the Office of 
Management and Budget (OMB). In 2024, the federal government spent $1.98 
trillion on health care, amounting to 29.4 percent of the federal budget 
and 6.9 percent of GDP. Healthcare spending, including programs like 
Medicare and Medicaid, was more than one-third of non-interest federal 
spending last year (33.8 percent) and more than twice the size of the 
defense budget (which totaled $874 billion in 2024, excluding the Defense 
Health Program, or 12.9 percent of the federal budget).

Healthcare spending far exceeded other sector-specific spending, such as 
education and training ($320 billion or 4.7 percent of the budget), 
agriculture and food assistance ($182 billion or 2.7 percent), 
transportation ($137 billion or 2.0 percent), housing ($70 billion or 1.0 
percent), and energy ($14 billion or 0.2 percent).



Federal healthcare spending has grown at a staggering rate over the last 
several decades, mainly through expansions of Medicare and Medicaid 
beginning in the 1960s that increased benefits and eligibility for those 
programs, but also due to an aging population, increased income and 
ability to pay for health care, and the rising cost of health care. In 
1962, prior to the advent of Medicare and Medicaid, the federal government 
spent $2.3 billion for health programs, representing about 2.1 percent of 
the budget and about 0.4 percent of GDP.

Back then, healthcare spending from all sources, including state and local 
governments as well as private spending, was about 5 percent of GDP, and 
the federal government’s share of that spending was about 7 percent. Since 
that time, overall healthcare spending has grown to 18 percent of GDP, as 
of 2024, and the federal share has grown to more than 38 percent.



As of 2024, Medicare spending reached $874 billion (net of premiums) while 
Medicaid surpassed $617 billion. The next largest category of healthcare 
spending is veterans’ medical care, costing $138 billion in 2024, followed 
by health insurance assistance, made up primarily of PTCs, costing $110 
billion in 2024. While run through the IRS, the federal government counts 
about 90 percent of the cost of PTCs as outlays because of the especially 
large refundable portion that is in excess of tax liability.

The cost of federal health insurance assistance has more than doubled 
since the pandemic, from $52 billion in 2020 to $110 billion in 2024, 
following enhancements that were made to PTCs as part of the American 
Rescue Plan Act of 2021, which were later extended through the end of this 
year as part of the Inflation Reduction Act of 2022. The enhancements 
reduce the maximum amount eligible enrollees are required to contribute 
toward health insurance premiums for health insurance purchased through 
the Affordable Care Act (ACA) exchanges and extend eligibility to people 
whose income is above 400 percent of the poverty level.



Fiscal Cost Compounded by Tax Preferences for Health Care
In addition to federal healthcare spending, the federal tax code provides 
several tax preferences for health care. PTCs are the largest tax credit 
in the tax code, which, in addition to the outlay effects described above, 
also reduced income tax revenue by about $14 billion in 2024, according to 
Treasury’s estimates.

Far and away the largest tax preference for health care is the exclusion 
for employer-sponsored health insurance (ESI) premiums, which reduced 
federal income tax revenue by $247 billion and federal payroll tax revenue 
by $152 billion in 2024. Other major health tax preferences include health 
savings accounts, the deductibility of medical expenses, the deductibility 
of charitable contributions to health institutions, and the deductibility 
of self-employed medical insurance premiums, which together cost about $46 
billion in 2024.

Treasury’s estimate for all health sector tax expenditures totaled $465 
billion in 2024, amounting to about 27 percent of all tax expenditures 
estimated by Treasury (Treasury does not account for the tax exemption for 
hospitals, which costs more than $15 billion per year). These tax 
expenditures amount to about 9 percent of all US healthcare spending from 
all sources.

By comparison, tax expenditures for housing totaled $290 billion (17 
percent of Treasury’s tax expenditure budget), education and training $105 
billion (6 percent), and energy $63 billion (4 percent) in 2024.



The fiscal cost of federal tax preferences for health care has grown at a 
slower rate than federal spending for health care, generally matching 
growth in overall US healthcare spending from all sources.

Combining health sector tax expenditures with federal healthcare spending, 
the total fiscal cost of federal healthcare subsidies was more than $2.4 
trillion in 2024, amounting to more than 47 percent of all US healthcare 
spending from all sources.

Healthcare Subsidies Projected to Continue Growing Under Current Law
Federal healthcare spending as a share of GDP has been on a remarkably 
steady trend upward, growing slightly more than one percentage point per 
decade on average over the last six decades. Spending growth was on course 
to continue at that rate until Republicans passed the One Big Beautiful 
Bill Act (OBBBA) that tightened rules and reduced eligibility for Medicaid 
and PTCs, which Democrats are seeking to unwind as part of the budget 
negotiations while simultaneously extending the PTC enhancements.

If nothing changes and the PTC enhancements are not extended, the OBBBA 
will reduce federal healthcare spending by about $1.1 trillion over the 
next decade, reducing growth in these programs to about half the 
historical rate so they rise from 6.9 percent of GDP in 2024 to about 7.4 
percent in 2034.

Healthcare tax expenditures are projected to grow from 1.6 percent of GDP 
in 2024 to about 2.0 percent in 2034. Combined with federal healthcare 
spending, the total fiscal cost of federal healthcare subsidies is set to 
rise from 8.5 percent of GDP in 2024 to about 9.4 percent of GDP in 2034.

How Sustainable Are These Subsidies and What Options Are There for Reform?
There are a lot of issues and goals to consider in healthcare 
policy—including improving affordability, access, and quality—but a 
primary concern should be the sustainability of federal healthcare 
subsidies in the context of unprecedented deficits and debt and their 
associated costs in the coming years.

Interest costs on the federal debt, for instance, are projected to reach 
an all-time high of $1 trillion, or 3.2 percent of GDP this fiscal year, 
before growing to more than 4 percent of GDP by 2034. The primary deficit, 
which excludes interest costs, is set to rise above 3 percent over the 
next decade, pushing the total deficit to levels that have never been 
sustained in peacetime.

We have modeled options to limit the largest healthcare tax expenditure, 
the exclusion for employer-sponsored health insurance, estimating that 
capping the income tax exclusion for the most expensive plans would raise 
as much as $389 billion over the next decade, about 0.1 percent of GDP in 
2034. While the exclusion and other tax expenditures could be limited 
further, there is much more scope for savings on the spending side through 
reforms to the major healthcare programs, including Medicare, Medicaid, 
and the ACA exchanges.

For instance, CBO has estimated several options to reduce Medicare and 
Medicaid spending that could save more than $4 trillion over the next 
decade, some of which would build on OBBBA reforms, including capping 
federal spending on Medicaid, limiting state taxes on healthcare 
providers, reducing federal Medicaid matching rates, increasing premiums 
paid for Medicare, and requiring site-neutral payments. These and other 
reforms to major healthcare programs, including streamlining ACA 
provisions, would reduce waste in healthcare spending, improve efficiency, 
and reduce cost pressures.

Studies indicate several problems with ACA insurance, including high cost 
of premiums and high implicit marginal tax rates from PTC phaseouts. 
Rather than continuing to subsidize the ACA and other inefficient 
healthcare programs, lawmakers should use this opportunity to change 
course and institute reforms that might finally “bend the cost curve” in 
health care downward.


-- 
November 5, 2024 - Congratulations President Donald Trump.  We look 
forward to America being great again.

We live in a time where intelligent people are being silenced so that 
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Every day is an IQ test. Some pass, some, not so much.

Thank you for cleaning up the disasters of the 2008-2017, 2020-2024 Obama 
/ Biden / Harris fiascos, President Trump.

Under Barack Obama's leadership, the United States of America became the 
The World According To Garp.  Obama sold out heterosexuals for Hollywood 
queer liberal democrat donors.