The state's largest health insurer wants to raise rates on small businesses by 3.8 percent this year.

The Hawaii Medical Service Association's proposed increase means the average cost for family coverage would rise by $37.56 to $1,018.86 a month. The increase is less than last year's 4.9 percent hike and the lowest since 1997.

Still the new rate will add to the high costs facing Hawai'i's small businesses.

"Insurance has been through the roof," said Matt Hewhouar, owner of Tropical Wholesale, a window and home siding company with more than 30 employees. Hewhouar said there is little he can do to escape the rate increase because the state requires him to offer health insurance to all full-time workers. "They can raise it to whatever they want and we have to pay for it," he said.

The 3.8 percent increase applies to about 11,000 businesses and covers 142,000 people who subscribe to HMSA's Preferred Provider Plan or its CompMed plans. It would take effect in July if approved by the state. The premium is usually split between companies and employees.

HMSA also has proposed an 8.5 percent increase for its Health Plan Hawaii (health maintenance organization) coverage that is used by about 56,000 members. The two rate increases would generate $23 million in added revenue for HMSA.

Healthcare use is rising as Hawai'i's population ages and as doctors adopt new technology that produces better results but is more costly, said Cliff Cisco, HMSA senior vice president.

Health insurance costs have been rising faster than inflation and wage gains, according to the Kaiser Family Foundation, a Menlo Park, Calif.-based nonprofit that provides information and analysis of healthcare issues.

HMSA's proposed 3.8 percent increase is lower than had been anticipated late last year because expense trends, including drug costs, have not risen as much as forecast, Cisco said.

Moreover, the proposed increase is less than the 8 percent average rise in healthcare benefit costs this year that large employers forecast in a national survey conducted by Watson Wyatt Worldwide, a consulting firm.

"The 8.5 percent is right on with what employers are projecting nationwide and the 3.8 is half that," said Bob Belko, a senior consultant in Watson Wyatt's Los Angeles office. "It's extremely competitive."

J.P. Schmidt, state insurance commissioner, has 90 days to review HMSA's proposal. Schmidt noted that the smaller rate request may be due in part to a tough stance his office has taken in reviewing rate requests.

Also, there are more competitors in the market and more alternative health plans being offered. That includes Nevada-based Summerlin Life and Health Insurance, which began offering health plans here in 2004.

"We have approved a number of rate filings but there have been a number that we have disapproved, saving Hawai'i citizens over $18 million," Schmidt said. Among those turned down were Kaiser Permanente Hawaii and HMSA filings filed in 2003.

With this year's increase, the cost for covering an average family under HMSA's Preferred Provider Plan will be about $1,019, including medical, vision, dental and drug coverage. The national average was $924 a month in 2005 for coverage of a four-member family, according to Kaiser Family Foundation data.

Cisco said the difference might be caused by the higher benefit levels offered locally than on the Mainland.

HMSA covers more than 700,000 people in Hawai'i, including those who work at large companies and for the state and federal governments. Rate increases for large employers are spread out over the year.

For small employers, even a 3.8 percent increase can be tough to absorb.

Patti Poleshaj, co-owner of Advantage Carpet Care, a Honolulu carpet-cleaning company with four employees, said she recently had to deal with an insurance increase from Hawaii Dental Service. The HMSA increase could mean she'll have to cut vision, drug and dental benefits.

"We can't always pass that on to our customers," Poleshaj said. "They're feeling the crunch, too."

Reach Greg Wiles at gwiles@honoluluadvertiser.com.