CareFirst BlueCross BlueShield could generate enough capital for its short- and medium-term needs as a stand-alone nonprofit company, but over the longer term it wouldn't have enough money to make a major acquisition, according to a consultant's report released yesterday by Maryland Insurance Commissioner Steven B. Larsen.

But, according to the consultant, the Blackstone Group, it's not clear whether such an acquisition would be good or bad for CareFirst.

"CareFirst already has regional scale and strong relative market share without a clear, immediate threat to that position," the report said.

Blackstone was hired by Larsen to examine CareFirst's business case for converting to a for-profit operation and selling itself to California-based WellPoint Health Networks Inc.

CareFirst has said it needs to become for-profit and be acquired because it needs larger size and more access to capital to remain competitive.

In a report released in September, Blackstone, a New York investment adviser, examined the $1.3 billion price CareFirst negotiated with WellPoint, saying it was too low, probably by several hundred million dollars.

The consultants' conclusions are to be presented - and challenged - at three days of hearings before Larsen next week.

Blackstone representatives are to testify Monday on the value of the company and Wednesday on the business case, with CareFirst and WellPoint presenting witnesses.

Tuesday's session will cover executive compensation.

Larsen's consultant on that issue, Jay Angoff, concluded that bonus and severance packages for CareFirst executives, tied to the deal, were excessive and illegal.

CareFirst, in filings this week in advance of the hearings, called Angoff's report "unsound and biased."

Yesterday, however, CareFirst's lawyers released a response to Blackstone's business case study, calling it "generally fair and even-handed in its analysis. CareFirst commends the Blackstone Group for its apparent objectivity."

The response, written by attorneys David M. Funk, Ren L. Tundermann and James F. Taylor, reviews how the insurer considered various alternatives in 1999 before deciding to sell.

The alternatives considered were for CareFirst to continue being a nonprofit, to merge with a nonprofit, or to become an independent for-profit company.

"The business case adopted by CareFirst was justified at the time it was adopted and remains justified in light of the continuing trends in the health care industry, making scale and access to capital important for CareFirst to maintain its current market position and better enable it to thrive over the long term," the response said.

Blackstone's latest report said there has been little indication so far that CareFirst is starved for capital.

It noted that over the past five years, for which it examined financial records, "CareFirst has generally been able to fund its cash requirements out of existing cash flow, with little need for external borrowings."

Also, it said, "CareFirst has spent a significant amount in terms of capital expenditures in comparison to its peers."

While CareFirst could not, in its current business form, make a large acquisition, Blackstone said, "Any benefits of absolute scale need to be weighed against the risks of an acquisition strategy and the increased complexities associated with operating in multiple markets."

Some large health insurers, such as Aetna Inc. and Cigna HealthCare, have run into trouble as they expanded, and have been cutting back, Blackstone pointed out.

It added that CareFirst's consultants "stated that there is a risk over the longer term that larger competitors such as Aetna or Cigna could resolve their own internal problems and become more aggressive in CareFirst's markets or smaller competitors like [Mid Atlantic Medical Services Inc.] could be acquired by larger, more well-capitalized companies.

"We believe that there is some validity to this concern," Blackstone said.