Kaiser Foundation Health Plan Inc., the state's second-largest health insurer, said it will raise premiums by an average of 3.75 percent for most of its Hawai'i members at the start of next year.

The increase for businesses and government entities employing about 180,000 workers comes as Kaiser Foundation's Hawai'i region copes with subpar financial returns and seeks funds to invest in its operations. The nonprofit yesterday reported an operating loss in its April-to-June quarter.

The increase follows Kaiser premium hikes of 3 percent this year and 11 percent in 2005, and comes against a backdrop of rising medical costs nationwide. Hawai'i employers must offer health insurance coverage to full-time workers under the state's 1974 Prepaid Health Care Act.

"It's the company's responsibility, and I believe in it and accept it," said Steve Allen, who employs more than 30 workers at his Allens Plumbing offices on Maui, O'ahu and the Big Island.

"I just wish I could keep it in check."

Allen said his monthly health insurance premiums have almost doubled to $289 an employee over the past six years. Like some small-business owners, he chooses to pay the entire premium and includes the costs in figuring out what to charge customers.

Kaiser isn't the only insurer raising rates. The Hawaii Medical Service Association's rate for small businesses that employ about 142,000 people rose 3.8 percent on July 1.

In its most recent quarter, Kaiser's Hawai'i operation earned $1.5 million, largely because of a change in the way investment income is allocated to it by its corporate headquarters. A year earlier it had investment income of $1 million.

The company said it has been working to pare expenses by postponing cost-of-living increases for executives and holding some positions open while implementing a new electronic billing system that boosts efficiency.

Even with that, the insurer's operating loss increased to $2 million, from $1.6 million a year before, as operating expenses rose faster than operating revenues.

Kaiser, which operates a hospital and 18 clinics, has had to pay patient-care expenses to other hospitals when its Moanalua hospital is full.

Net income as a percentage of revenue was 0.7 percent, below Kaiser's target. Allison Maney, acting chief financial officer for the insurer, would not say what net income margin the company seeks. In 2005, Kaiser reported a net loss of $456,000.

"We're looking for a healthy margin, definitely more than 0.7 percent," Maney said. That "is not where we need to be in order to reinvest to have a healthy organization."

She said more money is needed to invest in top-quality care, facilities, new equipment and technology.

Some businesses and government groups will see larger or smaller increases than the 3.75 percent average rise. The rate hike is Kaiser's first since the state stopped regulating health insurance rates in July.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.