Hawaii Medical Service Association members may face the biggest jump in insurance rates in three years in 2007 if healthcare costs continue to rise.

The state's largest health insurer said yesterday costs are rising faster than expected as the price of drugs escalates and members make more use of healthcare services.

Steve Van Ribbink, HMSA chief financial officer, said in an interview that rates will have to increase by more than they did in the past two years if cost trends remain.

Last year, rates for small businesses, HMSA's largest group, rose by 4.9 percent, followed by a 3.8 percent increase this year.

"It's painful because health insurance is roughly running $300 per employee" each month, said Helen Godwin, owner of Professional Image Inc., a printing, copying and graphics company with six locations in Honolulu.

Godwin said her health insurance costs work out to about $15,000 a month. A 5 percent increase would mean $750 more monthly, or higher if HMSA proposes a bigger increase.

"I worry about it, but frankly it's out of my control," said Godwin.

HMSA said it underestimated the jump in healthcare costs this year.

"Healthcare services trends had been moderate and are spiking up now," said Van Ribbink. "That's a concern."

The rising costs contributed to a $7.2 million net loss in the third quarter for HMSA, compared to a $6.4 million profit a year ago. It was the company's first quarterly loss in more than three years.

Both HMSA and Kaiser Permanente Hawaii, the state's largest health maintenance organization, have been trying to cope with rising healthcare and administrative costs. Kaiser earlier this month announced it would let go roughly 1 percent of its about 4,800 workers, in part because operating expenses have been more than revenue. Kaiser is expected to report its third-quarter financial results this week.

Nationally, healthcare costs have been rising faster than wages, with car makers who visited President Bush earlier this week telling him they pay more per car for healthcare than for steel.

At HMSA, healthcare services costs rose 7.1 percent in the third quarter to $434 million while revenue rose 3 percent to $452.6 million.

When administrative costs of $38.7 million were added, HMSA had a loss from operations of $20.2 million.

The company continues to carry a large reserve for emergencies. It reported reserves of $593 million, or 31.4 percent of quarterly annualized expenses. Van Ribbink said he expects the ratio to fall to 30 percent by the end of the year.

Van Ribbink said he has called together HMSA's department heads and asked them to look for places to cut costs and has also looked at ways to save on a major computer and software upgrade project that's added to the insurer's administrative expenses.

HMSA's rate increases have been under the national average in recent years, though employers say members are having to pay more out-of-pocket costs for services and drugs.

The insurer in recent years has filed rate increases in February for small businesses that in aggregate have more than 140,000 employees.

The next small-business rate filing will be the first one since a three-year test of healthcare rate regulation expired in July.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.