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Utah's online insurance marketplace, Avenue H, is still the focus of eleventh-hour negotiations with the Obama administration.

Unable to win legislative support for a state-run exchange that meets all federal requirements, Gov. Gary Herbert on Tuesday pitched a new scenario to U.S. Health and Human Services Sec. Kathleen Sebelius.

Utah is now proposing to keep and run Avenue H as a "shop" exchange for small businesses, relinquishing to federal officials the task of building a separate marketplace for individuals.

Herbert framed the idea as "a proverbial win-win."

"It allows Utah to stay true to its principles and objectives and the feds to...pick up the slack," he said during a phone interview Tuesday, about an hour after meeting with Sebelius in Washington.

The proposal is the Republican governor's latest chess move in Utah's bid for flexibility to preserve Avenue H, a key piece of the state's oft-touted — some argue, unsuccessful — health reform efforts.

"[Republican] Legislative leaders especially in the House said we don't want to touch the Affordable Care Act with a 10-foot pole," said Kelly Atkinson, a lobbyist for the insurance industry. "But the governor's office, dating back to Huntsman, had invested a lot of political capital in the exchange. It received a lot of national attention. This will allow him to keep it alive."

When it comes to exchanges, states have three choices under the federal law: run it themselves, let the feds do it, or partner on one with the feds.

Herbert's latest plan is being portrayed not as a partnership, but as a fourth option.

The governor wants to salvage Avenue H's "defined contribution" model, where employees can shop for coverage using a fixed amount of money from their employer.

But he does not want the portal to become a tool for enforcing the federal law's requirement to buy insurance, or for steering people to the public aid.

The health law envisions exchanges as one-stop shops where people can see if they're eligible for the low-income health program Medicaid, or for federal subsidies to put toward their insurance purchases.

"We want to bifurcate those responsibilities," said Herbert.

It's a retreat from his previous plan to expand Avenue H and open it to individuals, which won conditional federal approval last month. But Herbert said it has legislative support.

The coming weeks will tell if it passes federal muster.

"Conceptually they didn't seem to have a problem with it.... they want to have their legal people take a look at it," said Herbert. "But the phrase they used was, 'We want to find a way to get to yes.'"

One possible sticking point: Herbert wants the state's Department of Workforce Services to retain control of determining who is eligible for Medicaid, but separately from Avenue H.

Avenue H would not screen employees for possible eligibility or refer them elsewhere, which some consumer advocates say may not wash with the federal law.

It might strike employers as unfair, said Jason Stevenson, communications director at the Utah Health Policy Project. "There are a lot of small business owners who have employees who are eligible for Medicaid who would see an enormous cost savings."

Others, however, are content to let the feds run the individual exchange and handle Medicaid eligibility.

"[Workforce Services] is saying they need $12 million to handle the influx of new Medicaid enrollees. We could shift most of those costs to the federal government," said Lincoln Nehring, a health policy analyst at Voices for Utah Children.

Health industry leaders have voiced support for Avenue H. But Atkinson said he doubts Utah will be given much leeway to run it under its own rules.

"If you were to ask insurers, they would say it really doesn't matter to them who runs the exchanges," he said. "Either way, even when you have the state run it, you have to abide by federal rules."

@kirstendstewart —

What's next

Utah Gov. Herbert will explain his change of heart in a speech Wednesday at 10:30 a.m. MST before the American Enterprise Institute in Washington. —

What is Avenue H?

Utah touts Avenue H as a success story, the "red state" alternative to Obamacare. The portal allows employees to shop for coverage using contributions from their employer. It's the path to health coverage for 318 small businesses and 7,646 workers and their dependents.

Critics argue the model has failed to put a dent in the state's 378,000 uninsured, largely because, unlike the Affordable Care Act, the state has no mandate for residents to purchase insurance.