You're going to want to skim that paint line with some mud and sand it flat, otherwise it'll show badly through your new paint.
Basically with plaster, just scrape out any loose/bubbled spots and prime/patch them.
If your worried about mold inside the wall, that's another story. I'll say that old lathe/plaster walks don't seem to mold as badly as old drywall, but I have no idea what you're dealing with there.