CareFirst BlueCross BlueShield has no plans to drop executive bonuses tied to a sale of the company, or modify other aspects of its deal, until Maryland's insurance commissioner rules on the terms of the agreement - despite broad hints from the commissioner that the bonuses could compel him to block the deal.

Insurance Commissioner Steven B. Larsen, who must decide whether the acquisition is in the public interest, said yesterday that he must block the deal if he concludes that executives have benefited inappropriately, a legal term known as "inurement."

"The current formulation of the statute would prohibit me from approving the deal if I find there is inurement," Larsen said yesterday as he continued public hearings on whether to approve CareFirst's plan to convert to for-profit operation and sell itself to WellPoint Health Networks Inc.

Daniel J. Altobello, chairman of the board of CareFirst, responded: "The board does not intend to take up that issue until you have made your ruling about what is approved and disapproved."

"Does the board conclude that it's more important to support the bonuses than that the deal go through?" Larsen asked.

"I would not want to speculate on a hypothetical," Altobello answered.

He said there are a number of issues - including the final price and whether WellPoint pays in cash - on which Larsen could suggest changes in the deal. Larsen is expected to issue his ruling in February on whether the deal should go ahead, and, if so, what conditions he would require.

Under an agreement signed in November last year, CareFirst, the state's largest health insurer, would convert and be sold to California-based WellPoint for $1.3 billion in cash and stock. CareFirst's board has offered $33.2 million in deal bonuses to its executives, who also stand to collect as much as $55.8 million in severance payments and $30.7 million in tax benefits.

The legislature passed laws last spring blocking the bonuses and stipulating that the deal must be all cash.

Larsen has not ruled on the legality of the bonuses and severance payments, but showed strong skepticism in his questions yesterday.

Jay Angoff, a consultant to Larsen, reiterated in testimony yesterday that he believes the merger bonuses and most or all of the severance payments are illegal under the 2002 law, under a 1998 law spelling out the conversion process, and under common law governing nonprofits.

WellPoint said in September that it wanted to renegotiate the sale terms to comply with Maryland laws within 60 days, a period that has passed.

"We still feel the deal needs to be compliant with the law," WellPoint spokesman Ken Ferber said after the hearing.

In an interview after the hearing, Altobello said, "We are waiting for the commissioner's guidance. We have an application pending, and it's not up to us to subvert the process."

While the CareFirst board has no plans to try to change the deal before Larsen acts, Altobello said, "We would have no choice but to consider anything that WellPoint would offer" before Larsen decides, and, if necessary, amend its application.

"We can always attempt to renegotiate any provision," he said, "but I would not want to renegotiate them one at a time."

Angoff, a former Missouri insurance commissioner, testified yesterday that board had not fulfilled its legal duties in approving the bonuses. "The nonprofit status of CareFirst was the elephant in the room that no one talked about," he said. "The board still had an obligation to see that elephant."

Altobello and CareFirst lawyers and consultants took issue, testifying that the board had acted properly and that the executive payments were legal, at least at the time they were approved. Sheldon Cohen, a former commissioner of the Internal Revenue Service, testified that Angoff had used the wrong standards under the tax code in determining what constituted excessive payments.

As for this year's anti-bonus law, David M. Funk, who is representing CareFirst in the regulatory review, said yesterday, "We believe there may be constitutional issues that relate to the validity of his law, but we are not going to address those today."

William L. Jews, CareFirst's chief executive officer - who has not attended this week's hearings - said last week, "My contract was in place prior to that law. You can't retroactively change that. Those were valid contracts issued by our board."

Larsen questioned the CareFirst witnesses sharply on that and other points.

The commissioner asked Jay Smith, a lawyer who had advised the WellPoint board, whether he thought the all-cash law passed this year applied to the deal. "That is my understanding," Smith answered.

"Why would not the anti-bonus provision also apply to pre-existing contracts?" Larsen returned.

"I meant that no matter what we do, I expect you're not going to approve a transaction unless it's all cash," Smith replied. "I was not rendering a legal opinion."

Larsen also questioned why, if the bonus plan was to provide incentive for CareFirst executives to negotiate a higher price, it was not adopted until July last year - although CareFirst had received a "best and final" offer from WellPoint in April.

Gene Bauer, CareFirst's compensation consultant, said the prospect of bonuses "helps keep people's attention focused on the ongoing business," while the executives were, in effect, doing two jobs - preparing for the deal as well as operating the company.

Larsen, who noted that he does two jobs while the legislature is in session - working with legislators and running his department - mused about whether he should be in line for abonus from the governor, and commented, "This concept is foreign to a lot of people."