* Brings returned grants amount to some $90 million

* HHS likely would have to set up Kansas exchange

Reuters

By Alina Selyukh

WASHINGTON, Aug 9 (Reuters) - Kansas became on Tuesday the second U.S. state to return a large federal grant meant to help it create a prototype health insurance exchange as part of the Obama administration's healthcare overhaul.

Republican Governor Sam Brownback said the state would give back the $31.5 million it received from the U.S. Department of Health and Human Services to become an early leader, along with six other states, in establishing health insurance exchanges that other local government could use as a model.

Exchanges are meant to provide an open marketplace of competing insurance plans that allow uninsured people and small businesses to band together to negotiate cheaper rates.

Kansas's move brings the total amount of the returned exchange-related federal grants to almost $90 million as Republican governors seek to block implementation of the healthcare law supported largely by Democratic lawmakers.

Experts warn that many states are falling far behind schedule for a smooth and timely roll-out of the reform.

States are facing a deadline of Jan. 1, 2013, to submit detailed plans for their exchanges or see HHS come in and build one itself. Returning grants increases the likelihood that HHS would have to do the work.

"It could come around to hurt the state in the long run," said Sabrina Corlette, a research professor at the nonpartisan Health Policy Institute at Georgetown University.

"The more states that say: 'Forget it, let's have the Feds run it,' the more likely the (federal government) is going to have a one-size-fits-all solution. They're not going to be able to customize it for 30 states."

In April, Oklahoma returned its $54.6 million early innovator grant, the largest of the batch of seven issued in total. Kansas followed suit on Tuesday after months of internal wrangling between Insurance Commissioner Sandy Praeger and the conservative governor and legislature.

"Every state should be preparing for fewer federal resources, not more," Governor Brownback said in a statement. "To deal with that reality, Kansas needs to maintain maximum flexibility. That requires freeing Kansas from the strings attached to the Early Innovator Grant."

Commissioner Praeger, also a Republican, learned of his decision in an 8 p.m. phone call that came unexpectedly on Monday.

"I don't know why now," she said in an interview. "Right now, we can't really move forward. Whatever we do going forward is going to require the governor's office signing off on it. It's not looking real optimistic."

FIGHT AGAINST HEALTHCARE LAW

Kansas also received $1 million for planning the exchange like virtually all other states. Some $400,000 of that money has already been spent with another $200,000 pending approval, Praeger said, but both of those installments are meant for the state's effort to update its Medicaid program.

Because the Medicaid effort is supported by the state's executive branch and has to connect to the insurance exchange whenever one is set up, Praeger had pinned on it some of her hopes for having Kansas's own health insurance exchange.

"I'm disappointed," she said, but added that the steering committee and other local policy efforts already underway to customize the exchange for Kansans will nonetheless continue and the state will keep its $1 million planning grant.

Along with most Republican governors, Brownback has long rejected the notion of supporting President Barack Obama's healthcare overhaul, despite the possibility of opening his state healthcare systems to more federal scrutiny if he refused to set up exchanges.

Kansas is also one of a number of states challenging the very notion of the healthcare reform in court. [ID:nN07149800]

"There is a feeling among the more conservative elements around the country that if they pursue any efforts to establish exchanges, it will undermine their effort to get the law repealed," Praeger said.

So far, just over a third of U.S. states have enacted legislation or made other steps toward establishing an exchange. Legislation is pending in three other states and the District of Columbia.

The first wave of federal guidelines gave states flexibility in setting up the exchanges' infrastructure. But a number of crucial details have yet to be determined, including enrollment and eligibility requirements and the essential benefits that plans would have to provide. (Additional reporting by Andrew Seaman)

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