As part of New York Gov. David Paterson's health insurance reform agenda, the governor signed into law this week the Governor's Program Bill No. 278, which reinstates the New York State Insurance Department's authority to review and approve health insurance premium increases before they take effect. The law passed in a 111-17 vote.

Prior to the new law, New York regulated health insurance premiums under a "file and use" law, which limited the state's ability to disapprove health insurance premium increases and essentially allowed the insurance industry to self-regulate.

"Deregulation of health insurance premiums is a failed experiment leading to unjustified premium increases and more people losing their health insurance coverage," Paterson said in prepared remarks.

The law requires health insurers and HMOs to apply for approval from the state's insurance department in order to increase premiums.

"Before, health insurance companies could raise premiums as much as they wanted, and all we could do is check long afterward if, in fact, they were overcharging," David Neustadt, spokesman for the New York State Insurance Department, told DOTmed News. "The current rates are increasing at a much faster rate than before [the file and use law]."

The structure of the newly signed law is to ensure that any premium increase is "justified and not excessive," according to the governor's office. The insurance department has the authority to approve, modify or reject the application. The law applies to rate increases that will take effect on or after Oct. 1, 2011.

This move goes hand-in-hand with the federal Patient Protection and Affordable Care Act, which requires health insurers to report justifications for "unreasonable" rate increases, in addition to percentage of premiums spent on claims, quality of care, taxes and administrative costs.

"I applaud New York on its bold move to hold insurance companies accountable and prevent the kind of unreasonable rate increases that have made health insurance unaffordable for many American families," said U.S. Health and Human Services Secretary Kathleen Sebelius in a statement. "This is the kind of action that, together with the Affordable Care Act, is shifting power back to consumers."

Effective immediately, the legislation also requires insurers and HMOs to spend more of each premium dollar on medical claims. The medical loss ratio -- the percentage of premiums spent to provide medical care -- increases from 75 percent to 82 percent for small businesses covered and from 80 percent to 82 percent for individuals.

How insurance companies use their premium dollars is a factor in whether their requests for premium increases will be granted, said Neustadt.

"For too long New York families and small businesses have been faced with the nightmare of choosing between out-of-control premiums or forgoing health insurance," said Sen. Neil Breslin, chair of the Senate's Insurance Committee, in prepared remarks. "By restoring prior approval, we will be bringing smart and responsible regulation to the health insurance industry."

But the New York Health Plan Association (NYPHA) said there's "nothing good" about the law.

"It's the wrong direction for the state to be moving in and the wrong answer to the problem of rising health care costs in New York," Leslie Moran, senior vice president of NYHPA told DOTmed News.

The underlying costs of health care -- increased utilization, higher hospital costs and increased physician and drug costs -- are not addressed with the new law, she said.

"The law simply imposes price control or price fixing on health insurance premiums and ignores the real reason that health care premiums are going up," Moran explained.

She also pointed out that the state claims it's trying to reduce the cost of health care, but on Thursday the New York Senate passed a bill that would force insurance plans to offer very broad coverage of autism services.

"It's ironic that the governor and the legislature are saying we need to bring down the cost of health care and at the same time keep taking steps that do the exact opposite and drive up costs," Moran said.

Going forward, NYHPA plans to work with the insurance department to address concerns with the law, including technical flaws in the language and the unrealistic time line implemented for premium increase pre-approval.

"Now that they've signed the bill into law, we're not throwing up our hands and saying there's nothing we can do," she said.

According to the text of the law, the process of approval for premium increases will include public notification and opportunity for comment. The superintendent of insurance can reject a proposed rate adjustment if the increase is unreasonable, excessive, inadequate or discriminatory. The financial condition of the insurer may be considered in this determination. The superintendent must give a final determination to approve, modify or disapprove a premium rate adjustment within 60 days, or the rate is considered in effect.

Astrid Fiano contributed to this report.