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How about
awk '{$0=$0} ; $0 !~ del && NF {print $0 RS}' RS="}" del="hostgroup_members *\n" file

Try also

{ read X; while read SD US HN WM CM CC X
do cat <<EOF
define service{
service_description $SD
use $US
host name $HN
check_command ...

How about this:

while read desc use server warn crit mount
do
if [ "$desc" != "service-description" ]
then
printf "define service{\n"
printf "\t%s\t%s\n"...