Hawaii Medical Service Association has received state approval to boost premiums in July by a lower rate than initially proposed for 9,600 small businesses that employ 89,110 workers.

The state’s largest health insurer will implement an average rate increase of 3.7 percent instead of the 4.2 percent it had initially requested March 22 from the state Insurance Division, said Insurance Commissioner Gordon Ito.

The Insurance Division denied the initial rate request because "there were some provisions in the initial filing in calculations that we didn’t agree with," Ito said.

The department estimates the decrease will result in about a $3 million savings to small businesses.

"That’s substantial in terms of gross savings, but to each individual employer it’s relatively small," said Tim Lyons, president of the Hawaii Business League, which represents 900 small businesses. "Nevertheless we’ll take what we can get. In this economy that’s about the only thing I’ve heard that is going down except for profits."

The increase applies to all three HMSA plans: Preferred Provider Plan; Health Plan Hawaii Plus, its health maintenance organization plan; and CompMED plan, a program that features higher deductibles and lower benefits.

This is the smallest rate hike in at least five years for HMSA’s community-rated groups that renew health plans on July 1. HMSA boosted rates for its dominant preferred provider plan 7.6 percent in 2010, 12.7 percent in 2009 and 9.9 percent in 2008.

"It’s a significant drop in the rate increase from 2010," Ito said. "The division hopes this will provide much-needed relief to small businesses."

HMSA said in March that it needed its initial proposed increase to offset recent experience with rising health and drug costs. The rate affects approximately 93 percent of its small-business groups.

Steve Van Ribbinck, HMSA’s chief financial officer, said yesterday the lower rate will result in a $3 million reduction in revenue for the insurer and that he could not predict whether the approved increase would cover future health care costs.

For the first time, HMSA is unifying rate increases of its three health plans to limit volatility that had been prevalent in recent years, putting all three plans into one big risk pool.

HMSA, which had 693,683 members at the end of February, has 10,300 small-business groups that employ 124,236 members.