The Affordable Care Act is funded through a combination of taxes on higher-income earners, fees on healthcare industries, and savings from changes to existing federal programs like Medicare. Unlike a single appropriation, the law created multiple revenue streams designed to offset the cost of expanding insurance coverage to millions of Americans. The largest sources are two taxes on high earners that took effect in 2013, along with the federal government’s existing share of Medicaid spending.
Taxes on Higher-Income Individuals
The two biggest dedicated revenue sources are taxes that apply only above certain income thresholds. The first is the Net Investment Income Tax, a 3.8% tax on investment income (capital gains, dividends, rental income, and interest) for individuals earning more than $200,000 or married couples earning more than $250,000. This tax applies to whichever amount is smaller: your net investment income or the amount by which your income exceeds those thresholds.
The second is the Additional Medicare Tax, a 0.9% surcharge on wages and self-employment income above those same thresholds. This is layered on top of the standard Medicare payroll tax that all workers pay. Together, these two taxes generate tens of billions of dollars annually and represent the law’s single largest funding mechanism. Both took effect on January 1, 2013, and remain in place today.
Premium Tax Credits and What They Cost
The most visible spending under the ACA goes toward premium tax credits, which subsidize insurance purchased through the marketplace exchanges. The Congressional Budget Office projects that outlays for these credits and related spending will total about $112 billion in 2026. After a dip through 2028, driven partly by new eligibility restrictions and reporting requirements enacted in 2025, that figure is projected to climb back up to $150 billion by 2036 as enrollment and premiums grow.
Related spending includes the Basic Health Program, which a handful of states use as an alternative to marketplace coverage for lower-income residents, and programs that help stabilize premiums in the individual and small-group insurance markets.
Industry Fees
The ACA also imposed annual fees on specific healthcare industries. The most notable is the annual fee on branded prescription drug manufacturers and importers, which collects a combined $2.8 billion per year from drug companies. The fee is distributed among manufacturers based on their share of total branded drug sales to government programs.
The law originally included a separate annual fee on health insurance providers, but that tax was suspended multiple times and eventually repealed permanently as part of a 2020 budget package. A planned 40% excise tax on high-cost employer health plans, often called the “Cadillac tax,” was also repealed in that same legislation before it ever took effect. These repeals removed two significant projected revenue sources from the ACA’s original funding design.
How Medicaid Expansion Is Financed
Medicaid expansion, which extended coverage to adults earning up to 138% of the federal poverty level, is financed primarily by the federal government. Washington covered 100% of the cost of newly eligible enrollees from 2014 through 2016. That share phased down gradually and settled at 90% starting in 2020, where it remains today. States that have adopted expansion pick up the remaining 10%. This is considerably more generous than the standard federal match for traditional Medicaid, which varies by state but averages around 60 to 70 percent.
The Employer Mandate
Employers with 50 or more full-time employees are required to offer affordable health coverage or face a penalty known as the Employer Shared Responsibility Payment. In practice, this provision generates relatively little direct revenue. For tax year 2017, the IRS assessed $264 million in penalties but collected only $66 million. The mandate’s real function is as a compliance incentive: it pushes large employers to maintain coverage, which keeps millions of workers in employer-sponsored plans rather than on subsidized marketplace coverage or Medicaid.
The Individual Mandate’s Role
The original law also included a penalty for individuals who did not maintain health insurance. This was designed partly as a revenue source but mostly as a mechanism to keep healthy people in the insurance pool, which holds down premiums for everyone. Congress reduced the individual mandate penalty to $0 starting in 2019 as part of the 2017 tax reform law. The mandate technically still exists on paper, but it no longer generates any federal revenue. A few states have enacted their own individual mandates with financial penalties to fill that gap.
Medicare Savings That Offset Costs
A portion of the ACA’s cost is offset not by new revenue but by reductions in spending on existing programs, particularly Medicare. The law slowed the growth of Medicare payments to hospitals, insurers offering Medicare Advantage plans, and other providers. These weren’t cuts to benefits for Medicare enrollees but rather adjustments to how much the government pays the organizations that deliver care. Over the law’s first decade, these payment changes were projected to save hundreds of billions of dollars, making them one of the largest single offsets in the ACA’s budget math.
Risk Adjustment Between Insurers
One funding mechanism that often gets confused with federal spending is the ACA’s risk adjustment program. This system transfers money between insurance companies within the same state, not from federal coffers. Plans that enroll healthier, lower-cost populations make payments into a pool, and plans that cover sicker, higher-cost populations receive payments from it. The transfers within each state net to zero, meaning no federal tax dollars are involved. The purpose is to prevent insurers from profiting simply by attracting healthy customers while those covering people with serious health conditions lose money.
The Overall Budget Picture
The ACA was designed so that its new taxes and spending reductions would more than cover the cost of expanding coverage, producing a net reduction in the federal deficit over its first decade. That balance has shifted over time as some revenue sources were repealed (the Cadillac tax, the health insurance provider fee) and premium subsidies were temporarily expanded and then partially extended. The Congressional Budget Office regularly updates its projections, and the net fiscal impact in any given year depends on enrollment levels, premium growth, and whatever legislative changes Congress has made since the law’s original passage.