Individuals with employer-sponsored commercial health insurance may adjust their benefits during the open enrollment period that commenced for most people on Nov. 1st. What often goes unnoticed is just how heavily involved the federal government is in subsidizing this segment of the market.

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In light of the government shutdown, the media’s focus has been the expiration of the Affordable Care Act subsidies and what to do about them, as well as the financing of Medicaid. But what hasn’t gotten much attention is the fact that federal and state tax systems provide substantial financial benefits for individuals with commercial health insurance. This is particularly the case for the 165 million Americans who get coverage through their employers. Employer-paid health insurance premiums are tax-free for employees and count as a subsidy and a tax expenditure. And employers can typically deduct 100% of the premiums they pay for employee health insurance as a business expense. Whether such government involvement in healthcare markets is necessarily a good thing is a topic of ongoing debate.

The most prevalent form of health insurance coverage in America is subsidized in absolute dollars to a substantially greater extent than Obamacare. The exclusion from income and payroll taxes of employer and employee contributions for employer-sponsored insurance represents the largest tax subsidy in the healthcare market. And as KFF explains, because this isn’t reported to the individuals and families who benefit from it, they might not be aware of the tax exclusions that on average provide them with a subsidy worth several thousands of dollars annually.

In reference to the discussion on the future of ACA premium tax credits, Larry Levitt, KFF’s Executive Vice President for Health Policy, tweeted “I wonder how many people realize that the federal government spent $384 billion last year providing a tax subsidy for employer-provided health benefits, with higher income people getting bigger subsidies.”

Additionally, Medicaid is paid for by state and federal governments. And Medicare is heavily funded by the federal government. This includes both traditional Medicare and privately administered Medicare Advantage. While the latter isn’t run by the government, it owes its existence and profitability (through generous subsidies) to the federal government. And then there are additional tax breaks which the government grants, such as the ability of self-employed individuals to claim the premiums they pay for health insurance as a tax deduction.

KFF analysis reveals that healthcare accounted for 27% of overall federal spending in 2024. Federal monies support health insurance programs such as Medicaid and Medicare directly. And the government assists the commercial employer-sponsored healthcare insurance sector and the ACA exchanges indirectly through tax subsidies. The former cost the government roughly $384 billion in 2024; the latter, $111 billion.

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Employer-provided coverage is by far the single largest source of health insurance for Americans. And it’s been this way for many decades. In the 1940s, employers began to offer health benefits to attract workers. Federal regulators subsequently made employer-sponsored coverage tax-exempt while employees receive these benefits tax-free, further encouraging its adoption.

Employer plans pool risk, setting premiums based on the collective health profile of employees. This can result in lower costs per person. In addition, the insurance offerings vary from high-deductible plans with lower premiums to comprehensive options with broader provider networks and minimal out-of-pocket expenses.

The average family health insurance plan is estimated to now cost $27,000, up from $6,438 in 2000. The amount contributed by workers has spiked from around $1,600 in 2000 to more than $6,400 in 2025.

Perhaps the federal government’s tax structure in the employer-sponsored sector is impeding effective cost control. This could result in regulatory capture which happens when a government agency intending to act as a benefactor to the public instead appears to favor the interests of the industries it regulates.

Nevertheless, there are valid reasons for the government to intervene in healthcare, whether in the commercial or public sectors. The healthcare space is qualitatively different from other markets and prone to market failure or the lack of viable markets altogether. Market failure refers to situations where market mechanisms fail to achieve an efficient allocation of resources; this can manifest itself in unequal access to healthcare services, inefficient allocation of resources and poor healthcare outcomes. For one thing, there are very high levels of uncertainty, starting with consumers making choices about insurance to cover future health events. There’s also asymmetric information, which means, for instance, that doctors know (much) more about what to prescribe than the patient. And third-party payments shield patients from the actual costs of treatment.

Nobel-prize winning economist, Kenneth Arrow, famously wrote in 1963 “it follows that the government should undertake insurance in those cases where this market, for whatever reason, has failed to emerge.” Libertarians dispute whether Arrow really intended for the government to intervene. Regardless, practically no-one questions the existence of market failures in healthcare, just the remedies for them.

While government intervention seems a logical step to correct for market failures, free market advocates make the point that government action can bring with it unintended consequences. Every stakeholder has a financial interest in the business of healthcare, but also in winning government largesse in the form of tax-preferential policies. Those with vested interests include, among others, insurers, hospitals and drug makers. Each wants a piece of the fiscal and profit pies.

Profit-seeking behavior itself isn’t necessarily problematic as it generally works towards everyone’s benefit in most sectors of a smoothly operating capitalist economy, as Adam Smith first described 250 years ago. But in healthcare the markets are riddled with imperfections and opacity to begin with. Throw in a system rife with special interest-driven rules and regulations that often don’t cohere and favor one group over another, and you’ve got a recipe for trouble.