Subsidies for health insurance in the United States are not limited to plans offered under the Affordable Care Act (ACA). Federal support extends to a range of coverage options, including Medicare, Medicaid, and employer-sponsored insurance.
Larry Levitt, executive vice president for health policy at KFF, explained: "The vast majority of people with health insurance get some kind of federal subsidy for it, from Medicaid to Medicare to the ACA to employer-sponsored insurance."
Medicare is the second-largest program in the federal budget after Social Security. Nearly half of its more than $1.1 trillion annual spending comes from general federal funds. The rest is funded by payroll taxes and premiums paid by over 66 million enrollees.
Medicaid covers more than 70 million low-income Americans and costs over $918 billion annually. The program is jointly financed by the federal government, which pays about 65%, and states, which pay around 35%.
Employer-sponsored health coverage also receives significant federal support through tax breaks rather than direct spending. Michael Cannon, director of health policy studies at the Cato Institute, said: "It's a world apart from Medicare, Medicaid, and Obamacare - from the government writing checks to people."
Job-based insurance provides coverage for at least 154 million people under age 65. In comparison, about 22.9 million are enrolled in ACA plans this year because they do not have access to job-based insurance.
The largest single tax exclusion in the federal budget is related to employer-sponsored health plans. For this fiscal year, contributions that employers make toward employee health coverage are estimated to cost $451 billion in forgone revenue according to estimates from the Joint Committee on Taxation and Congressional Budget Office. Employers can write off these contributions as business expenses while employees do not pay income or payroll taxes on their value.
These tax savings vary depending on plan costs and worker income levels but can be worth hundreds or thousands of dollars each year for workers—especially those with higher incomes or more expensive plans.
Levitt noted that even though workers benefit from these subsidies through tax exclusions, many may not recognize them as such: "It doesn't necessarily feel like a subsidy to people," he said. "They do feel like they're paying."
The current tax treatment dates back decades; it was enacted into law in 1954 after World War II wage controls led employers to offer health benefits as an incentive.
Supporters say this encourages companies—particularly large ones—to offer coverage since it is more valuable than equivalent taxable wages for employees. However, critics argue that this approach leads both employers and workers toward selecting pricier plans and increases overall healthcare spending while benefiting wealthier individuals most.
Paul Fronstin of the Employee Benefit Research Institute pointed out that attempts to change or cap this exclusion have failed repeatedly: "It's had a bipartisan target on its back for 40 years." He added: "Any change... would raise some revenue but it's also a tax increase for workers... There will be winners and losers in that equation."
Some experts warn that reducing or eliminating these incentives could prompt some employers—especially smaller ones—to reconsider offering coverage due to rising costs; average family premiums reached nearly $27,000 last year according to KFF data.
Elizabeth Mitchell, CEO of Purchaser Business Group on Health representing large employers providing insurance said: "If there's not some sort of tax incentive I would expect them [employers] to revisit whether they would bear those costs."
Cannon argues against current policy because it limits worker choice: "You are effectively saying let the employer control a huge chunk of your earnings and enroll in the plan the employer chooses." He suggests additional wages could instead go into individual accounts used for medical expenses.
Employers respond that they can negotiate better rates than individuals might manage alone. Mitchell commented: "It is challenging for an enormous employer to negotiate fair prices with large consolidated systems... It's hard to imagine how an individual would be able to navigate our current system."
She also disagreed with claims that generous job-based benefits drive up healthcare usage unnecessarily: "That's a tired economic theory that doesn't apply in health care," she said. "People don't shop for health care because they want more of it. They use health care because they need it. It's fundamentally different."
