Some Republican governors wrote a letter to Health and Human Services Secretary Kathleen Sebelius demanding specific changes to the insurance exchanges, with the threat being that they wouldn’t construct their own versions in their states if they didn’t get their way. Their specific concerns, also outlined in an op-ed from Indiana Gov. Mitch Daniels, are:

Provide states with complete flexibility on operating the exchange, most importantly the freedom to decide which licensed insurers are permitted to offer their products

Waive the bill’s costly mandates and grant states the authority to choose benefit rules that meet the specific needs of their citizens.

Waive the provisions that discriminate against consumer-driven health plans, such as health savings accounts (HSA’s)

Provide blanket discretion to individual states if they chose to move non-disabled Medicaid beneficiaries into the exchanges for their insurance coverage without the need of further HHS approval.

Deliver a comprehensive plan for verifying incomes and subsidy amounts for exchange participants that is not an unfunded mandate but rather fully funded by the federal government and is certified as workable by an independent auditor.

Commission a new and objective assessment of how many people will end up in the exchanges and on Medicaid in every state as a result of the legislation (including those “offloaded” by employers), and at what potential cost to state governments. The study must be conducted by a neutral third-party research organization agreed to by the states represented in this letter.

Let’s break this down. GOP governors want to be allowed who can join their exchanges exclusively, superseding the minimum requirements to remain on the exchanges as set by the law. This would almost certainly lead to more junk coverage and less competition, as the big insurers limit the alternatives in the state exchanges through political influence. The governors want all mandates eliminated, including on what minimum coverage must be provided, and, presumably, the mandate for coverage in the first place. They want the useless health savings accounts restored. After seeking all this power to determine the look of the exchanges, they want a plan for income verification paid for by the federal government. When told such a plan exists – it’s called the IRS – no doubt the familiar lie about 16,500 IRS agents being needed for the law will return. (also there are all kinds of eligibility rules already used by the states, for example to determine eligibility in Medicaid.)

The threat here is very curious. They say that if these demands aren’t met they won’t set up their own exchanges. But they know that, if they decline, HHS will step in and run them. That’s how the law was constructed, and the White House is practically counting on it.

“For a lot of things there is a federal backstop,” explained one administration official. “States have the first crack at it, for the lack of a better phrase, and states are empowered to take the lead on things, that’s what we wanted … But at the same time we aren’t going to allow someone not to get important consumer protections just because he has the misfortune of living in a state that doesn’t like the law.”

Len Nichols, a health care policy expert with George Mason University, has consulted a number of state governments on implementing reform. And when he looks at how governors are handling the federal grants coming their way, he offers a simple set of questions:

“Are you confident you can beat Barack Obama in 2012? If the answer is no, and you say, ‘I don’t want to do reform and bet I can beat him,’ if you lose, then Kathleen Sebelius will set up your exchange. Who wants that? No one. Not even Massachusetts.”

“What the feds are basically saying is ‘okay, fine, if we win then we are doing the exchange,’ then every insurer in that state will panic,” Nichols added.

I’m not sure insurers would have to panic in that event – Sebelius was very generous in offering waivers to companies who couldn’t comply with all the immediate standards in the law, and she is already looking to modify the CLASS Act, a long-term care insurance provision in the law which some experts believe will not be able to sustain itself. So she has not been rigid. Still, I doubt that insurers would rather have Sebelius implement the exchanges in Alabama or Tennessee than the local state officials, just because of how much cheaper it would be to lobby them (and as we’ve seen, the lobby money is flying).

If these Republican governors want to threaten to have regulations default to federal control, have at it. But I suspect it’s an empty threat, more for show. Even some of the Governors who signed that letter stressed that they want to have the option of operating the exchanges locally. Of course, eventually a Republican will return to the White House, and having exchanges under federal control at that time may be palatable. In Virginia, Governor Bob McDonnell has sunsetted his state exchange, which could move it to the feds precisely in time for a Republican HHS Secretary to degrade the program rules, leaving Virginia officials off the hook for changes.