The state insurance commissioner late yesterday rejected HMSA's proposed average 12.8 percent rate hike for thousands of small businesses and approved a 10.4 percent increase instead.

Insurance commissioner J.P. Schmidt said the requested increase wasn't warranted, based on his department's review of the proposed rate hike, and that HMSA, the state's largest health insurer, can implement increases averaging 10.4 percent.

The increases will take effect next month.

"They have accepted that decision and are moving ahead," said Schmidt, explaining that the lower rate hike probably will mean short-term losses for HMSA but that a lower increase is more appropriate on a long-term basis. HMSA officials weren't immediately available for comment last night.

The proposed 12.8 percent hike would have been the largest in 19 years for HMSA's Preferred Provider Plan and was to apply to the annual increase in rates for the insurer's small-business group. The classification covers 11,000 small businesses that offer coverage for 144,000 workers and their dependents.

In March, HMSA announced it was proposing the large increase because of climbing healthcare costs, including those for physicians, hospitals and emergency room services. The insurer has found itself walking a thin line between businesses that complain about rising rates and healthcare providers who say they aren't receiving enough in insurance reimbursements.

Schmidt's rejection of the higher increase was the first of an HMSA filing since his office restarted rate regulation after a two-year hiatus. His office was supposed to give HMSA an answer on the request within 60 days but took longer as his analysts sought more information.

Schmidt said his office disagreed on how HMSA proposed allocating some of its administrative costs to the small-business group, along with how much investment interest it credited to the premiums in calculations.

"As a result, we felt that the rate increases they requested were not fully justified," Schmidt said.

"We had a significant amount of communication with HMSA. It was a significant increase."

HMSA's proposed 12.8 percent average increase was actually composed of eight small-business plans with rate hikes ranging from 12.4 percent to 14.8 percent.

After an analysis, the insurance commissioner's office proposed hikes ranging from 9.9 percent to 11.6 percent, he said. These average out to 10.4 percent.

Schmidt said he met with HMSA officials yesterday afternoon to inform them of his decision and they agreed to refile a request at the lower rates, which he then approved.

HMSA has said it's been working to keep premium increases to a minimum, including applying investment income to operating costs, something that it normally has used to build up reserves. In 2008, as in 2007, it expects to use all of its investment income to subsidize members' rates.

At the same time, the insurer in the past year has increased its hospital fee schedule under its commercial plan and says it has boosted how much it reimburses physicians.

The insurer also has attempted to institute new programs to help boost the quality of healthcare here.

Yesterday, HMSA announced it had become the first health plan in the nation to offer an integrated online healthcare solution. This includes collaborating with Microsoft Corp. to make the software maker's HealthVault Internet health platform available to all Hawai'i residents. It also is teaming with American Well Inc. as part of the effort to enable live communication between consumers and healthcare providers.

But the increased payments, rising healthcare costs and new programs have come with a financial cost, and last year the insurer had a $22.6 million loss. During the first quarter of this year the red ink continued with a $10 million net loss.