Federated learning (FL) is revolutionizing healthcare by enabling collaborative machine learning across institutions while preserving patient privacy and meeting regulatory standards. This review delves into FL’s applications within smart health systems, particularly its integration with IoT devices, wearables, and remote monitoring, which empower real-time, decentralized data processing for predictive analytics and personalized care. It addresses key challenges, including security risks like adversarial attacks, data poisoning, and model inversion. Additionally, it covers issues related to data heterogeneity, scalability, and system interoperability. Alongside these, the review highlights emerging privacy-preserving solutions, such as differential privacy and secure multiparty computation, as critical to overcoming FL’s limitations. Successfully addressing these hurdles is essential for enhancing FL’s efficiency, accuracy, and broader adoption in healthcare. Ultimately, FL offers transformative potential for secure, data-driven healthcare systems, promising improved patient outcomes, operational efficiency, and data sovereignty across the healthcare ecosystem.