The Maryland Insurance Administration said yesterday that it has fined CareFirst Blue Cross Blue Shield $79,000 for illegally refusing to pay portions of subscribers' hospital bills.

But the regulatory agency found that CareFirst violated the law in only two of nine areas cited last year in a complaint by Maryland hospitals.

The Association of Maryland Hospitals & Health Systems had accused the state's largest health insurer of arbitrarily using industry standards to assess hospital stays instead of taking into account the complexities of individual cases. But on that point, regulators concluded that Blue Cross "did not, as a business practice, deny medically necessary care."

In cases where CareFirst ruled that patients unnecessarily spent time in a hospital, independent reviewers hired by the state Insurance Administration agreed with the insurance company about 90 percent of the time.

"I think it's fair to say the major allegation and I think perhaps the most damning allegation against Blue Cross Blue Shield--that they arbitrarily denied [coverage of] hospital days--turned out not to be true," Maryland Insurance Commissioner Steven B. Larsen said.

CareFirst said the fines involve "very minor parts" of its operation. The insurer said it disagreed with the findings that it broke the law.

In response to the hospital group's 1998 complaint against what was then known as Blue Cross Blue Shield of Maryland, the Insurance Administration reviewed the company's handling of hospital bills using 1997 data. Delmarva Foundation for Medical Care Inc., a medical peer-review organization, assisted with the study. The review focused on CareFirst's HMO business and generally excluded its traditional indemnity customers.

The agency fined the insurer's Free State Health Plan subsidiary $16,000 for refusing to pay for days in the middle of hospital stays when patients were waiting for tests or procedures. Typically, the insurer contended that it wasn't obligated to pay for those days because the hospitals were responsible for delays in treatment. But in eight of 49 cases, the administration's independent reviewers found that the patient was in no condition to undergo the test or procedure on the disputed days, let alone be moved from the hospital.

The Insurance Administration fined the health plan an additional $50,000 for refusing to pay for diagnostic tests and other services provided on the disputed days. In 26 percent of the 387 cases, the review found, the company refused to pay for needed care, showing "a pattern of denying benefits."

The Insurance Administration also fined the CareFirst subsidiary $13,000 for violations in 13 individual cases that the hospital association singled out in its complaint. In one of those cases, the health plan denied payment for several weeks of a hospitalization that lasted more than a year for a 55-year-old man with second- and third-degree burns over 88 percent of his body. The patient suffered from kidney failure, brain injury and frequent heart attacks; he eventually died in the hospital.

In 11 individual cases cited by the hospitals, no CareFirst violations were found.

Mid Atlantic Medical Services Inc. of Rockville was fined $9,000. The administration found that MAMSI violated the law in 10 cases and committed no violation in 25 cases singled out by the hospital group.

In a statement, MAMSI said its procedures for reviewing bills "are fair, reasonable and consistent," adding that the matter "involved a small number of billing and payment disputes with certain hospitals."

The Maryland Insurance Administration is preparing to conduct a broad review of MAMSI, like the one just completed on CareFirst.

"We're somewhat disappointed that the penalties aren't higher, based on the seriousness of the violations," said Calvin M. Pierson, president of the Association of Maryland Hospitals & Health Systems.

The report did not answer two of the hospitals' nine questions: whether CareFirst denied payment for services after advance approvals, and whether the company was late in making payments.