Here is where the tax code enters the story. Compensation in the form of wages and salaries is subject to the income tax and the payroll tax. But compensation in the form of employer-provided health insurance is not subject to either. If a firm gives a dollar in wages to a typical worker, the worker keeps only about 65 cents; if the firm gives a dollar in health coverage to the same worker, the worker keeps the full dollar.

This asymmetry tilts the playing field in favor of paying workers in insurance rather than in cash. As a result, people end up with insurance that is excessive and wages that are too low. The nation ends up spending too much on health care.

The Cadillac tax helps level the playing field by curbing this subsidy for the most generous insurance plans, which do the most to drive up health costs. Starting in 2018, the policy will tax the excess of health insurance costs above a threshold ($10,200 for individual coverage and $27,500 for family coverage). Once it is in effect, companies that have paid workers in the form of expansive health coverage will have an incentive to scale back this insurance and pay more in the form of wages and salaries.

Health care costs have grown much more slowly in recent years than was anticipated, resulting in substantial savings for the federal government, businesses and consumers. The reason for the decrease in the rate of growth is widely debated. Some experts say it happened because of President Obama’s policies, while others say it happened in spite of them. But almost every expert agrees that containing health care costs is essential and that the Cadillac tax will help in the future. A recent study by the Congressional Research Service estimates that the policy will reduce annual health spending by 2.5 to 3.6 percent in 2024.

Might companies use the Cadillac tax as an excuse to reduce health coverage and, instead of increasing wages, simply pocket the savings? Some may try, but the success of this strategy would be fleeting. In the long run, the compensation of labor, like most prices in the economy, is governed by supply and demand. Any employer that tries to pay less than the market requires will struggle to recruit and retain workers.