Unveiling the Hidden Subsidies: A Look at Federal Tax Dollars and Health Care
In the world of health care, subsidies often take center stage, especially during the Affordable Care Act's enrollment period. But here's where it gets controversial: there's more to these taxpayer-funded health insurance subsidies than meets the eye.
While politicians debate the future of healthcare affordability, it's easy to assume that these subsidies are the sole taxpayers' contribution to the U.S. healthcare system. However, that assumption couldn't be further from the truth.
"The vast majority of insured individuals receive some form of federal subsidy," says Larry Levitt, Executive Vice President for Health Policy at KFF. This includes programs like Medicaid, Medicare, the ACA, and even employer-sponsored insurance.
Let's delve into these broad taxpayer supports, which often go unnoticed due to their association with work-based coverage.
Tax Breaks: The Unseen Subsidies
Nearly half of the over $1.1 trillion spent annually on Medicare, the second-largest federal budget program after Social Security, comes from general federal funds. The remaining funds are derived from payroll taxes and premiums paid by over 66 million enrollees.
Medicaid, the nation's largest health insurer, covering over 70 million low-income individuals, costs more than $918 billion annually. It's jointly funded by the federal government (65%) and states (35%).
For both programs, taxpayer dollars partially fund the expenses. However, a less obvious form of federal support exists through employer-sponsored health coverage.
Michael Cannon, Director of Health Policy Studies at the Cato Institute, explains, "It's a different world compared to Medicare, Medicaid, and Obamacare, where the government writes checks to individuals."
Job-based insurance provides coverage for at least 154 million people under age 65. In comparison, about 22.9 million people enrolled in Affordable Care Act plans this year, primarily due to the lack of job-based insurance. Extending the enhanced ACA subsidies, which expired at the end of 2025, would cost approximately $350 billion over a decade, or roughly $35 billion annually.
Contributions to employer-sponsored health plans are the largest "exclusion" in the federal budget, a tax policy that exempts certain income from taxes. For this fiscal year, the estimated amount is $451 billion, according to the Joint Committee on Taxation and the Congressional Budget Office.
Employers can write off the money spent on offering health coverage as a business expense. Workers receiving this benefit don't pay income or payroll taxes on its value, resulting in significant tax savings.
These savings can amount to hundreds or even thousands of dollars annually for workers. The amount varies, with the largest breaks going to those with the most expensive health plans and those in the upper tax brackets. Contributions to health savings accounts are among other tax breaks related to health insurance.
However, this exclusion can be challenging for insured workers to comprehend, as most employees still contribute a portion of their pay to health coverage. Even though they're not taxed on this contribution, "it doesn't necessarily feel like a subsidy," Levitt says. "They do feel like they're paying."
The Evolution of Tax Treatment
The tax treatment of work-based health insurance policies evolved alongside the practice in the U.S., fueled during World War II when wage and price controls sparked interest in offering health coverage to attract workers. It was officially enacted into tax law in 1954.
Supporters, including labor unions and employers, argue that it encourages companies to offer health insurance, which most large companies do. Smaller companies are less likely to offer insurance, even with the tax incentive, due to the cost.
Opponents of the tax break highlight the lost revenue to the Treasury and argue that the tax exclusion leads employers and workers to choose the most generous and expensive health insurance, driving up healthcare spending. They also claim that the tax break benefits wealthier workers more than those in lower-income tax brackets.
While there's currently no pending legislation to modify the tax break, the growing federal deficit has employer groups concerned. The outcome of any changes would vary, according to KFF's Levitt. "It's not clear that it would result in increased wages for everyone. Some workers have more negotiating leverage than others."
Efforts to cap or eliminate the exclusion have failed over the past four decades. "It's had a bipartisan target on its back for 40 years," says Paul Fronstin, a director at the Employee Benefit Research Institute.
Any changes would generate revenue but also increase taxes for workers. "There will be winners and losers in that equation," Fronstin notes.
With job-based coverage being the primary way Americans obtain health insurance, some policy experts warn that eliminating or reducing the exclusion could remove the incentive for employers to offer coverage. While some employers might continue offering coverage without the tax break, it's a significant expense, and others might drop it. According to KFF, average family premiums cost employers nearly $27,000 last year.
Elizabeth Mitchell, CEO of the Purchaser Business Group on Health, argues that employers are better equipped to negotiate higher-quality, lower-cost health insurance packages than individuals. "It is challenging for an enormous employer to negotiate fair prices with large consolidated systems. So, it's hard to imagine how an individual would navigate our current system."
She disputes the argument that the tax break leads to higher healthcare prices, driven by overly generous employer plans. "That's an outdated economic theory that doesn't apply to healthcare. People use healthcare because they need it, not because they want more of it. It's fundamentally different."
This article was edited by Paula Cohen and is part of KFF Health News, a national newsroom producing in-depth journalism about health issues and one of the core operating programs at KFF, the independent source for health policy research, polling, and journalism.
