A managed care company will be compensating some customers for a shortfall in the average 2006 New York small group loss ratio.

Oxford Health Plans, a unit of UnitedHealth Group Inc., Minnetonka, Minn., recorded a 2006 New York small group loss ratio of 70.58%, New York State Insurance Department officials report.

That loss ratio fell below the minimum New York state small group loss ratio of 75%.

To make up for the gap, Oxford will pay a $50 million settlement to 36,746 New York small business policyholders with about 300,000 health plan participants, officials say.

The payments will average $1,360 per affected business, or 5.5% of the total average 2006 annual premium, officials say.

The settlement affects users of Oxford’s small group Freedom Plan Direct, Freedom Plan Metro and Freedom Plan EPO products. It does not affect Oxford’s small group and direct-pay health maintenance organization and “point of service” policyholders.

Oxford executive have put out a statement noting that they originally had planned to make up for the loss ratio shortfall by contributing to a state risk pool.

Because implementation of a risk pool regulation fell through, Oxford approached the state about paying refunds directly to small employers, the company says.

Eric Dinallo, superintendent of the New York department, confirms that Oxford cooperated with state efforts to address the low 2006 small group loss ratio.

“Oxford did the right thing in working with the insurance department to make sure consumers got their money back,” Dinallo says in a statement.

Dinallo and New York Gov. David Paterson, D, say the Oxford settlement shows lawmakers should restore the state insurance department’s authority to review and approve small group rate requests.

Before 1996, the department had the authority had to approve rate increase requests before they took effect.

Since then, the department has had the authority to make carriers refund excess underwriting gains, officials say.

“An after-the-fact settlement in 2008 does nothing for those businesses that may have had to drop coverage in 2006 because they could not afford a larger than necessary premium increase,” Dinallo says.