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Uninsurable Utahns will see their subsidized health insurance coverage plan shifted to federal oversight in July after funding ran short and state officials refused to take on the risk.
The federally-funded HIP-Utah program covers individuals who have been rejected by insurers because they are too sick.
The program was initially funded with $5 billion, but stopped adding new enrollees in February when the money began to run out.
In late April, federal officials gave states just two options for running out the remainder of the program: take over the costs and risk themselves or return it to federal oversight.
Opposed to underwriting the program with any state money since 2010, Gov. Gary Herbert sought a third option, asking federal health officials to allow SelectHealth, the health insurer that administers the program for Utah, to take over the program until the end of the year.
The proposal was rejected in an e-mail sent to the state on Thursday, citing concerns about costs and legal liabilities of allowing third party management, said Robert Spendlove, a policy adviser to Herbert.
"Unfortunately, the federal government hasn't been flexible," Spendlove said. "They've tied our hands."
In a statement, SelectHealth officials said they were disappointed by the decision from federal officials and would work to ensure a smooth transition for program participants.
"This approach would have allowed [plan] members to continue to receive current benefits, services and most importantly uninterrupted care from their established providers," company spokesman Spencer Sutherland said.
No one on the plan is at risk of losing coverage, but it's not clear whether enrollees will be subject to increased premium costs or reduced benefits.
On Thursday, Sally Burns, associate director of federal HIP-Utah, told a legislative health care reform task force that HHS officials have indicated that some changes would be made to the program in order to keep it financially viable through the end of the year.
The Obama administration failed to seek an additional appropriation for the program in its most recent budget. The program is set to expire in 2014, when insurance companies can no longer bar individuals with preexisting medical conditions from getting insurance.
Since 2010, Utah has received about $59 million for the federal HIP-Utah program. Spendlove said federal officials had estimated it would cost as much as $30 million to fund it through the end of the year.
Many of those covered through the program have costly chronic health problems. Utah's program spends $7.50 for every $1 it collects in premiums, which are already high, when compared to premiums for traditional insurance plans with lower risk pools.
Utah officials believe the state's program is better run and more cost-effective than anything the federal government can offer, Spendlove said.
"That's the real downside of the this whole change," he said. "These people who are going to shift to the federal program are not going to get the kind of services they've had."