U.S. healthcare is financed through a patchwork of public programs, private insurance, and direct payments from individuals. In 2024, total national health expenditure reached roughly $5.3 trillion, with the federal government sponsoring 31 percent, households covering 28 percent, private businesses contributing 18 percent, and state and local governments picking up 16 percent. No single entity pays for most of it, which is part of what makes the system so complex.
The Five Major Funding Streams
Private health insurance is the single largest category of health spending, accounting for $1.6 trillion in 2024, or 31 percent of the total. Most of this flows through employer-sponsored plans, where companies and workers split the cost of premiums. Medicare, the federal program for people 65 and older and some younger people with disabilities, made up 21 percent at $1.1 trillion. Medicaid, the joint federal-state program for lower-income Americans, accounted for 18 percent at $932 billion. Out-of-pocket spending, including copays, deductibles, and services insurance doesn’t cover, totaled $557 billion, or 11 percent. The remainder comes from other private sources like philanthropy and investment income from health organizations.
Employer-Sponsored Insurance
Most working-age Americans get health coverage through their jobs. Employers and employees share premium costs, and the arrangement comes with a massive tax advantage: neither the employer’s contribution nor the employee’s share (when paid through payroll deductions) counts as taxable income. That tax exclusion cost the federal government an estimated $299 billion in lost income and payroll tax revenue in 2022, making it the single largest tax break in the federal budget.
Over the 2024 to 2033 period, federal subsidies for employer-based coverage are projected to total $5.3 trillion. In practical terms, the government finances a significant chunk of private insurance indirectly by choosing not to tax it. This is one of the least visible but most expensive ways healthcare gets funded in the U.S.
How Medicare Is Funded
Medicare draws from two separate trust funds, each with its own revenue sources. Part A, which covers hospital stays, is funded primarily through a payroll tax. Employees and employers each pay 1.45 percent of wages, and self-employed workers pay the full 2.9 percent. Additional income comes from taxes on Social Security benefits and interest on trust fund investments.
Parts B and D, which cover doctor visits, outpatient care, and prescription drugs, work differently. About 75 percent of their funding comes from general federal revenue, meaning Congress appropriates the money from the same pool that funds the rest of the government. The remaining 25 percent comes from monthly premiums paid by enrollees. This is why Medicare is often described as partly an insurance program and partly a government-funded entitlement. Over the next decade, federal subsidies for Medicare are projected to reach $11.7 trillion, nearly half of all projected federal health insurance subsidies.
Medicaid’s Federal-State Split
Medicaid is jointly financed by the federal government and individual states, but the split is not 50-50 in most cases. Each state receives a Federal Medical Assistance Percentage (FMAP) based on a formula that compares the state’s per capita income to the national average. Poorer states get a larger federal share. The federal match has a floor of 50 percent and a ceiling of 83 percent.
In fiscal year 2025, for example, Alabama’s federal match is about 73 percent, meaning the federal government covers roughly three-quarters of the state’s Medicaid costs. Wealthier states like California and New York sit at the 50 percent floor. Texas receives a 60 percent match. The Children’s Health Insurance Program (CHIP) gets an even more generous split: each state’s CHIP match is calculated by reducing the state’s share under Medicaid by 30 percent, which pushes the federal contribution higher. Administrative costs are generally split evenly regardless of the state.
Combined federal subsidies for Medicaid and CHIP are projected at $6.3 trillion over 2024 to 2033.
Marketplace Plans and Premium Subsidies
People who don’t get insurance through an employer or a government program can purchase coverage on the Affordable Care Act (ACA) marketplaces. To make these plans affordable, the federal government provides premium tax credits to households earning between 100 and 400 percent of the federal poverty level. For most recent years, temporary expansions have removed the upper income cap, allowing higher earners to receive smaller subsidies as well.
Federal spending on marketplace subsidies and related nongroup coverage is projected at $1.1 trillion over the next decade, a much smaller slice than Medicare or Medicaid but a critical lifeline for self-employed workers, gig workers, and people whose employers don’t offer coverage.
What You Pay Out of Pocket
Even with insurance, Americans spent $557 billion out of pocket in 2024. This includes deductibles (the amount you pay before insurance kicks in), copays for office visits and prescriptions, coinsurance (your percentage share of a bill), and the full cost of services that insurance doesn’t cover, like certain dental, vision, or cosmetic procedures. Out-of-pocket spending grew 5.9 percent in 2024, reflecting both rising prices and the trend toward high-deductible health plans that shift more upfront costs to patients.
The Cost of Running the System
A notable share of every healthcare dollar goes not to clinical care but to administration: billing, claims processing, credentialing, prior authorization, quality reporting, and other paperwork. Estimates put administrative spending at 15 to 30 percent of total health expenditure. The U.S. spends roughly $1,055 per person on administrative costs, the highest among comparable wealthy nations by a wide margin.
At least half of that administrative spending appears to be wasteful, meaning it doesn’t measurably improve health outcomes. That translates to $285 to $570 billion a year in spending that produces no patient benefit. The U.S. has 44 percent more administrative staff than Canada and its physicians spend a larger share of their working hours on paperwork (13 percent versus 8 percent for Canadian doctors). Researchers have estimated that targeted reforms could eliminate up to $265 billion in administrative waste annually.
Where Spending Is Headed
Healthcare’s share of the economy is growing. In 2023, health spending represented 17.6 percent of GDP. CMS projects that figure will climb to 20.3 percent by 2033, meaning roughly one in five dollars generated in the U.S. economy will flow through the healthcare system. The driver is straightforward: health spending is projected to grow at an average of 5.8 percent per year through 2033, outpacing overall economic growth of 4.3 percent per year. An aging population, rising drug costs, and increasing utilization of services all contribute to the gap.
Total federal subsidies for health insurance alone are projected at $25 trillion over the 2024 to 2033 period. Medicare accounts for nearly half of that, Medicaid and CHIP about a quarter, and employer-based tax exclusions about a fifth. These numbers underscore a basic reality of U.S. healthcare financing: despite the prominent role of private insurance, the federal government is by far the largest single payer in the system.