Alyssa Lane
Understanding the allocation of federal funds is essential for comprehending the priorities and commitments of a nation. The federal budget is divided into approximately 20 categories, known as budget functions, which organize spending based on their purpose, such as National Defense, Transportation, and Health. Within the Health category, various programs and services are funded, including Medicare and Medicaid, which provide health insurance coverage to eligible individuals. The allocation of funds towards medical insurance is a significant aspect of federal spending, impacting the well-being and accessibility of healthcare services for citizens.
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What You'll Learn
Medicaid and Medicare funding
Medicaid and Medicare are government-sponsored health insurance plans that provide coverage for millions of Americans. Medicare is a federal program, while Medicaid is administered at the state level, although it is funded by both the federal government and each state.
Medicare is the health insurance program run by the federal government for people aged 65 and older. In 2021, Medicare spending, net of income from premiums and other offsetting receipts, totaled $689 billion and accounted for 10% of the federal budget. Medicare spending on Part A, Part B, and Part D benefits in 2021 totaled $829 billion, up from $541 billion in 2011. These amounts reflect gross spending and include spending on beneficiaries in both traditional Medicare and Medicare Advantage. Medicare funding comes from payroll taxes, premiums paid by recipients, and interest earned on trust fund investments. According to the Medicare Trustees, Medicare spending is expected to grow, with projections showing that net Medicare spending as a share of the federal budget will increase from 10.1% in 2021 to 17.8% in 2032. This growth is driven by higher enrollment, rising health care costs, and increased payments to Medicare Advantage plans.
Medicaid is a free health insurance program offered through a partnership between states and the federal government for people with limited incomes. Eligibility for Medicaid is based on current income, and most health care services are covered at little or no cost. While Medicaid is administered at the state level, all states participate in the program voluntarily. The Affordable Care Act (ACA) increased the cost to taxpayers by extending medical coverage to more Americans. Medicaid funding comes from the federal government and states, with additional funding provided through federal matching funds for eligible low-income adults. For example, President Joe Biden's American Rescue Plan of 2021 offered incentives for states to expand their Medicaid programs, with additional federal funding provided to cover adults up to age 65 with incomes at or below 138% of the federal poverty level.
Both Medicare and Medicaid received additional funding as part of the fiscal relief package in response to the 2020 economic crisis, including funds from the CARES Act, which allocated $100 billion for healthcare providers and suppliers for expenses related to COVID-19.
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Federal spending on health insurance
The federal government's spending covers a range of areas, including Social Security, Medicare, military equipment, highway maintenance, building construction, research, and education. Within healthcare spending, there are various sources of funds, including private health insurance, Medicare, Medicaid, and others. Spending trends in healthcare are influenced by factors such as the utilization of healthcare goods and services, insured rates, and overall economic growth.
Medicare, a federal government-run health insurance program for individuals 65 and older, is included in the mandatory funding category. This means that funding for this program must be allocated annually due to authorization laws. On the other hand, discretionary spending, which includes national defense and other agency administration, is determined annually by Congress and the President.
The impact of proposed cuts to federal spending on health insurance has been a topic of discussion. For instance, Republican proposals to reduce spending on Medicaid and Obamacare have been estimated to result in a loss of health insurance for 8.6 million Americans, according to the Congressional Budget Office.
While the federal budget does not specify the exact percentage allocated to health insurance, it is evident that healthcare, including insurance programs, is a significant area of federal spending and policy discussion. The dynamics between mandatory and discretionary spending categories and the utilization of healthcare services influence the allocation of funds within the healthcare sector.
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Federal budget deficit
The federal government spent $1.9 trillion on healthcare programs and services in the fiscal year 2024, accounting for 27% of all federal outlays in that year and the largest category of federal spending. Over 80% of all federal support for health programs and services, including spending and tax subsidies, goes towards subsidizing health insurance coverage. Medicare accounts for the largest share (36%) of total federal support for health programs and services, followed by Medicaid and CHIP (25%), employer coverage (17%), and ACA Marketplaces (5%).
The federal budget deficit is the amount by which the US government's total budget expenditures exceed its total revenues in a given year. The deficit is primarily driven by two factors: mandatory and discretionary spending. Mandatory spending includes programs such as Medicare, Medicaid, Social Security, and interest on the national debt, while discretionary spending covers defense, education, and other government programs.
To address the federal budget deficit, the Biden Administration has proposed savings and revenue measures to reduce the deficit in the FY 2024 budget. These include lowering prescription drug costs, extending the solvency of the Medicare Part A trust fund, and making permanent the ACA's enhanced premium tax credits. Additionally, the administration has extended the 2% sequestration of Medicare spending into FY 2032, initially set to expire at the end of FY 2031.
While the Biden Administration has ruled out cuts to Social Security and Medicare, other health programs such as Medicaid, the Affordable Care Act (ACA) premium tax credits, and discretionary spending on federal agencies like the CDC are potential targets for spending reductions. Proposed cuts to federal spending on health programs have trade-offs and could lead to an increase in the number of uninsured individuals, reduced access to healthcare, higher consumer costs, and decreased payments to healthcare providers.
The Congressional Budget Office (CBO) plays a crucial role in analyzing the impact of legislation on the federal budget. For instance, in May 2025, the CBO estimated that a Republican proposal to cut spending on Medicaid and Obamacare would result in 8.6 million fewer Americans having health insurance.
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Federal government spending breakdown
Federal government spending covers a wide range of areas, including Social Security, Medicare, military equipment, highway maintenance, building construction, research, and education. This spending can be divided into two primary categories: mandatory and discretionary. Mandatory spending includes funding for entitlement programs like Medicare and Social Security, which are required by law to be funded annually. Discretionary spending, on the other hand, is money that is formally approved by Congress and the President during the annual appropriations process. Congress typically allocates over half of the discretionary budget towards national defence, with the remainder funding other agencies and programs.
The federal budget is further divided into approximately 20 categories, known as budget functions, which organise federal spending based on their purpose. Some examples of these budget functions include National Defence, Transportation, and Health. The Health budget function includes spending on health insurance programs, such as Medicare and Medicaid, as well as administrative costs associated with insuring individuals.
Healthcare spending in the US has exhibited varying trends over the years. In 2020, during the COVID-19 pandemic, there was a spike in federal government expenditures related to the pandemic response, resulting in an overall increase in healthcare spending. Following the pandemic, healthcare spending decelerated in 2021 and 2022, returning to pre-pandemic growth rates. However, in 2023, healthcare spending growth outpaced GDP growth for the first time since the pandemic, driven by increased utilisation of healthcare goods and services, as well as a high insured share.
Proposed legislation by Republicans to cut federal spending on Medicaid and Obamacare has sparked debates about the potential impact on health insurance coverage. While initial estimates claimed that 13.7 million Americans would lose insurance, a more accurate assessment by the Congressional Budget Office put the number at 8.6 million. These proposed cuts highlight the significant role of federal spending in shaping healthcare access and coverage for millions of Americans.
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Healthcare spending trends
In 2020, during the COVID-19 pandemic, there was a notable spike in federal government expenditures related to healthcare. This resulted in an overall increase in total spending growth for that year. However, in 2021, as the pandemic's impact began to wane, there was a decline in pandemic-related government spending, leading to an 8-percentage point decrease in total spending growth.
Following the pandemic, healthcare spending decelerated in 2021 and 2022, returning to pre-pandemic growth rates. However, in 2023, healthcare spending accelerated once again, driven by increased utilization of healthcare goods and services, as well as a high insured share. For the first time since the pandemic, the growth in healthcare spending (7.5%) surpassed GDP growth (6.6%), with healthcare spending reaching 17.6% of GDP, similar to pre-pandemic levels.
Looking at the breakdown of healthcare spending, hospital services and physician services are two of the largest categories. The net cost of health insurance is also a significant factor, which includes the difference between premiums and benefits, along with various administrative costs and fees. Overall, healthcare spending trends in the US have been dynamic, responding to factors such as the COVID-19 pandemic, changes in insured rates, and fluctuations in GDP growth.
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