Insurance Commissioner Steven B. Larsen agreed yesterday to give CareFirst BlueCross BlueShield until July 12 to submit a plan to resolve issues around the merger of two CareFirst HMOs.

It's the latest step in a long-running and somewhat arcane dispute over a decision that has little immediate impact, but could determine the distribution of hundreds of millions of dollars if CareFirst converts to for-profit operation.

Since last summer, CareFirst has been moving to close its money-losing FreeState HMO, based in Maryland, and merge its operations into the profitable CapitalCare HMO - now renamed BlueChoice - based in the District of Columbia.

Larsen doesn't argue with the idea of a merged HMO, but he wants CareFirst's Maryland operation to own 64 percent of BlueChoice. His counterpart in Washington, Insurance Commissioner Lawrence Mirel, thinks Maryland's share should be 57 percent.

In the background is CareFirst's plan to convert to for-profit operation and sell itself to California-based WellPoint Health Networks Inc. for $1.3 billion. If the deal is approved, that money would be divided among the jurisdictions according to the assets in each part of the operation. It would be used for health-related foundations or similar purposes.

In addition to dividing assets at conversion, Larsen said, he is responsible for seeing that the insurance company is properly managed. If CareFirst's Maryland operation transfers an asset - in this case, members - to its Washington operation, it should get cash or other value in return, he said.

"We feel like we're caught in the middle, trying to referee," between the two insurance commissioners, said Jeffery W. Valentine, a CareFirst spokesman.

Larsen, however, said it is CareFirst's responsibility to solve the dispute.

In March, Larsen threatened to halt his review of CareFirst's conversion-and-sale application until the dispute was resolved. But when some progress was made in discussions, he resumed his study of the CareFirst-WellPoint application.

Earlier this month, Larsen wrote to CareFirst, noting that he has authority to take a range of actions against an insurer, including removing officers or directors of the company. "I hope and believe it will not come to us having to trigger the removal process," Larsen said yesterday, "but there didn't seem to be any understanding on CareFirst's part of the significance of this problem." Valentine said of the removal threat, "We take seriously anything the insurance commissioner says."

Valentine said, "We are promising to have a full-blown set of options for [Larsen's] consideration on or before July 12. We're anxious to get it resolved. It's getting in the way of some of our other initiatives." He said he hoped the matter could be concluded by August.

Dana Sheppard, senior counsel to Washington's insurance commissioner, said yesterday: "The information we saw - the documents, data and so forth - supported a split of 57-43."

A joint study for the two insurance commissioners, conducted when CareFirst was created in 1998 as a holding company controlling the Maryland and D.C. Blue Cross plans, established the 64-36 ratio. Sheppard said, however, that since then, as it gained members and profitability, "the D.C. plan has gotten more valuable."

He said an accurate accounting was important because otherwise, "if they ever convert, we will have given away charitable assets."