Why America's Debt Crisis Is Tied to Its Broken Health Care System

America’s Debt and Health Care Crisis: One Problem, Two Faces

America faces two intertwined crises: a debt crisis and a health care crisis. These are not separate issues but two sides of the same problem. The Cato Institute’s new Handbook on Affordability provides critical insights into the root causes and potential solutions.

The Fiscal Picture: Deficits as a Structural Threat

The federal government has run persistent deficits, creating a structural threat to economic stability. As Romina Boccia and Dominik Lett explain in the handbook’s second chapter, when debt grows faster than the economy, investors anticipate one of three outcomes: higher future taxes, deeper spending cuts, or inflation that erodes the real value of government debt. If Congress fails to commit to the first two, inflation becomes the default choice—exactly as seen in the 2021 inflation surge, driven by deficit-financed spending with no repayment plan.

The Federal Reserve responded by sharply raising interest rates, further reducing purchasing power. Yet, politicians have avoided meaningful fiscal restraint, leaving interest rates and prices unnecessarily high. Restoring credibility once lost is difficult and costly, and Congress appears unwilling to pay that price. Without change, the cycle is likely to repeat.

Deficits Are Driven by Social Security and Medicare

The debt problem is not evenly distributed. Two programs dominate: Social Security and Medicare. Social Security alone carries approximately $28 trillion in unfunded obligations. Medicare’s costs are projected to grow indefinitely without a ceiling, making these programs unsustainable without structural reform. Without intervention, the debt path remains mathematically unsustainable, ensuring continued inflation risks.

The Health Care Connection: Why Subsidies Make Costs Worse

The United States spends nearly 18.5% of national income on health care—more than any other nation and double the average of other wealthy OECD democracies. The standard political response is to propose more government subsidies to help patients cover costs. However, as Michael Cannon and Jeffrey Singer argue in the Handbook, subsidies are not a solution but a primary cause of unaffordability.

The mechanism is straightforward: When Medicare, Medicaid, and other government or quasi-private spending insulate patients from the true cost of care, the market’s natural price-disciplining feedback loop breaks down. Patients who do not pay out-of-pocket for marginal services have no incentive to question costs. Providers, in turn, face no pressure to reduce prices, perpetuating the cycle of rising health care expenses and debt.