To control medical expenditure is important to residents, medical insurance funds, and public finance. Based on China Labor Force Dynamics Survey in 2014 and 2016 in China, with the methods of the two-part model and the counterfactual framework, the research examines the impact of drinking water pollution on the medical expenditure of residents, and the spending burden of medical insurance funds. The results indicate that: Firstly, drinking water pollution increases the outpatient and inpatient expenditure from residents, which also increases the outpatient and inpatient reimbursement expenditure. Secondly, drinking water pollution contributes almost 10% of the outpatient expenditure and 7.5% of the inpatient expenditure. Thirdly, residents with lower socioeconomic status suffer a heavier burden of medical expenditure due to drinking water pollution; the per capita outpatient expenditure and hospitalization expenditure of poor residents due to drinking water pollution are equivalent to 1.46 times and 1.34 times of non-poor residents, respectively. Fourthly, in 2016, the medical expenditure contributable to drinking water pollution in China is about 340 billion yuan, which is equivalent to 7.4% of the total health expenditure this year, and the reimbursement expenditure from medical insurance funds contributable to drinking water pollution is about 150 billion yuan, accounting for about 12% of the expenditure of medical insurance funds.