In a blow to the Patrick administration, an insurance appeals board overturned the state's cap on health premium increases for small business and individual customers covered by Harvard Pilgrim Health Care. The three-member administrative panel - which consists of attorneys who work for the state Division of Insurance - found that rate increases Harvard Pilgrim initially sought in April are reasonable given what it must pay to hospitals and doctors. That ruling trumped the Insurance Division's earlier finding that the requested increases were excessive, a view that reflects Governor Deval Patrick's campaign to curb health costs. Insurers cheered the ruling, which bodes well for three other companies now before the appeals board with their own cases against capped rates. 'The decision shows what we have been saying all along,' said Lora Pellegrini, president of the Massachusetts Association of Health Plans, a trade group based in Boston. 'The denial of carrier rates was inappropriate.' Instead of trying to cap rates, Pellegrini said, lawmakers should pass legislation limiting the ability of health providers to charge ever-escalating prices. Harvard Pilgrim said it has not yet decided whether to retroactively implement the increases - which cover April through June, and average roughly 8 to 12 percent - and is still waiting for a decision on a similar increases scheduled to take effect in July. Patrick denounced the ruling and said it must be overturned. 'We cannot continue to let small businesses and working people be victimized by out-of-control insurance premium hikes,' Patrick said in a statement. 'This fight is not over.' Attorney General Martha Coakley can appeal the ruling in Suffolk Superior Court. Melissa Karpinsky, a Coakley spokeswoman, said that the office is reviewing the decision. Eric Schultz, Harvard Pilgrim's chief executive, said the ruling shows that hospitals, not insurers, are the main reason for the escalating price of medical care. 'There is a relatively short list of providers that drive the lion's share of costs,' he said. Schultz said he hopes the decision will spur the administration to work with health insurers and providers to figure out ways to reduce costs, instead of ordering caps on increases. 'We really need to sit down collectively,' Schultz said, 'and work through real solutions to control costs. Rejecting rates is not the answer.' The administrative panel that delivered 's decision is also hearing appeals from Blue Cross Blue Shield of Massachusetts, Tufts Health Plan, and Fallon Community Health Plan, which have proposed double-digit increases of their own. The panel is expected to issue rulings in those cases in the next few months. 's decision gave them reason for optimism. Jay McQuaide, a spokesman for Blue Cross Blue Shield, the state's largest health insurer, called it a 'very encouraging development.' 'We have maintained all along that the rates we filed are actuarially appropriate and sufficient to cover the costs of the benefits in this plan,' he said. Patti Embry-Tautenhan, a spokeswoman for Tufts Health Plan, said, 'This decision confirms our long held position that the actions of the Division of Insurance were not based in law.' And Christine Cassidy, a spokeswoman for Fallon, said the insurer was not surprised that Harvard Pilgrim won its appeal. 'This action is exactly what we're asking the Division of Insurance hearing committee to do in our case,' Cassidy said. Barbara Anthony, the state's consumer protection chief, said the ruling will not prevent the state from continuing to turn down increases it believes are too high. Anthony said the agency is also trying to work with insurers and hospitals to find alternate ways make medical care more affordable. 'This is not a setback, because we are staying the course,' she said. 'This is one bump in the road, a long road of getting health care costs under control.' The insurers' appeals followed Insurance Commissioner Joseph Murphy's April decision to deny rate increases for most plans covering individuals and small businesses, following through on Patrick's promise to reject requested rate increases deemed excessive. The four major insurers, including Harvard Pilgrim, sought increases averaging 8 percent to 32 percent, for hundreds of products. Arguing the rate caps would cause them to lose millions of dollars, the insurers sought an injunction in Suffolk Superior Court that would have allowed them to implement the higher rates. But Judge Stephen E. Neel said the companies needed to first exhaust the appeals process within the Insurance Division. In February, Patrick implemented emergency regulations calling for reviews of proposed increases. The rejection of 235 out of 274 increases proposed by insurers for plans covering individuals and small businesses marked the first time the state had turned down health premium increases. Insurers said the move would cause chaos in the industry, causing them immediately to lose millions of dollars. Michael J. Widmer, president of the Massachusetts Taxpayers Foundation, said the Patrick administration's actions were arbitrary and unfair, but he was surprised by the board's ruling. 'I had expected that the hearing officer would support the division's actions and return it to the courts,' Widmer said. 'And in the end, I thought the courts would rule against the division.' Jon Hurst, president of the Retailers Association of Massachusetts, said the decision will further hurt small businesses already trying to decide whether to offer health insurance, lay off people, or close their doors because of the economy. 'This is a great win for Harvard Pilgrim and the hospitals, but it's a huge loss for Main Street,' Hurst said. 'Something has to give here.' Hurst called on legislators to pass comprehensive health insurance reform and cost savings for small businesses before they go on summer break. 'There is no larger issue for small businesses than health care,' he said. 'Our elected officials would be remiss not to fix this problem before they go home and run for reelection.' Mark Pothier of the Globe staff contributed to this report. Jenn Abelson can be reached at abelson@globe.com; Todd Wallack at twallack@globe.com. 