Utah has until Wednesday to respond, she said.
The program was designed under Obamacare as a stop-gap for the uninsurable, to last until Jan. 1, 2014 when insurers will be prohibited from turning down people with pre-existing health conditions.
But funding for the $5 billion program is running out, because enrollees many of them with expensive chronic conditions such as diabetes and cancer proved costlier than expected. FederalHIPUtah spends $7.50 on care for every $1 it collects in premiums from beneficiaries and already requires hefty monthly premiums from clients.
Obama did not ask for any additional funding for the program in his latest budget, and a Republican bid to keep the program going by tapping other funds in the health care law failed to win support in the House last week, according to The Associated Press.
To ensure there's enough money to pay claims for existing beneficiaries, federal officials halted enrollment in March. The program covers 100,000 Americans nationally and 1,300 Utahns.
None of these beneficiaries are at risk of losing coverage prior to their moving to a private health plan in January 2014, which they'll purchase on health exchange marketplaces.
"If we don't assume the risk, the feds will assume administration of the program effective July 1," said Burns. "But if that happens enrollees could have disruption in continuity of care. Benefits could change for members. There is some uncertainty for this high-cost population."
Burns wouldn't put a dollar figure on the proposed cap, saying only "there is not a huge gap between what [federal officials] are proposing and our [spending] projections."
But there's little incentive for states to assume risk, which would put them in the political hot seat for any cost-cutting measures to stay under budget.
In a letter last week to Health and Human Services Secretary Kathleen Sebelius, state officials said they were "blindsided" and "very disappointed" by the federal proposal. "We are concerned about what will become of our high risk members' access to this decent and affordable coverage," wrote Michael Keough, chairman of the National Association of State Comprehensive Health Insurance Plans.
States and local nonprofits administer the program in 21 states, and the federal government runs the remaining plans.
"Enrollees also appear to be at risk of increases in both premiums and out-of-pocket costs that may make continued enrollment cost prohibitive," added Keough, who runs North Carolina's program. He warned of "large-scale enrollee terminations at this critical transition time."
The crisis is surfacing at a politically awkward time for the Obama administration, which is trying to persuade states to embrace a major expansion of Medicaid under the health care law, notes the AP. It may undercut one of the main arguments proponents of the expansion are making: that Washington is a reliable financial partner.
States are free to accept or reject the Medicaid expansion, and the new problems with the stopgap insurance plan could well have a bearing on their decisions.
The Associated Press contributed to this report.