Daugaard said South Dakota will join other states that have chosen not to run their own exchanges. About half the states apparently will let the federal government run exchanges, at least initially.
"After extensive research and analysis, it has become very apparent that operating our own exchange will simply not work for South Dakota," Daugaard said in a written statement.
After the Supreme Court upheld the health law in June, Daugaard said the state wouldn't implement any part of the law until at least after the November election in the hope that a new president and new Congress would overturn it. The state faces a deadline of Nov. 16 to let federal officials know whether it would operate its own insurance exchange.
On Wednesday, the governor said annual operating costs for a state-operated exchange would be too expensive, costing between $6.3 million and $7.7 million.
"The federal law requires exchanges to be self-sustaining by 2015, which means we would either have to charge a fee to South Dakota citizens using the exchange, or increase taxes, neither of which I am willing to do," Daugaard said.
Kirk Zimmer, chief executive officer of DAKOTACARE, an insurance company operated by the South Dakota Medical Association, said the availability of insurance will not be affected by whether the exchange is run by the state or federal government.
"I don't think it will affect an insurance company's decision to participate in the exchange or not," Zimmer said.
Deb Fischer-Clemens, director of public policy for Avera Health, which runs hospitals, clinics and its own insurance plan, said she supports the governor's decision because a state-run exchange would cost too much. The state apparently will keep its authority to regulate insurance after a federal exchange is created, she said.
"I think it's the only option the governor has at this time," Fischer-Clemens said.
House Democratic Leader Bernie Hunhoff of Yankton said he believes state lawmakers should have been allowed to decide whether the state sets up its own exchange.
"I think that should be a decision made not just by the governor but by the Legislature, with the public at large weighing in," Hunhoff said.
Hunhoff said he doesn't know if a state-run exchange would be better than one operated by the federal government, mostly because no one knows that the federal exchange will include. But a federal exchange may not take into account issues important in South Dakota and other rural states, he said.
"I'd be worried that the Washington answer might not be the right answer for South Dakota," Hunhoff said.
Dave Hewett, president of the South Dakota Association of Health Care Organizations, said he believes the governor is justified in letting the federal government run the insurance exchange because a state-run exchange would cost too much. He said he doesn't think the governor's decision not to set up a state-run exchange will affect the hospitals, nursing homes or other facilities that are members of the association.
Daugaard said Wednesday he still hopes the federal law is repealed because he believes it expands government while doing little to curb the rising cost of healthcare.
"In the absence of that, our state must work to ensure that even as the federal government implements this law, the state retains control over the regulation of health insurance," the governor said.
Tony Venhuizen, the governor's communications director, said when South Dakota submits its plan telling federal officials that the state will not run its own exchange, it also will propose that the state be allowed to manage the plan. The state would decide which companies are eligible to offer insurance policies through the exchange and would continue regulating the licensing, marketing and other aspects of the insurance industry in the state, he said.
"It allows the state to retain the overall insurance regulation function," Venhuizen said.
Hunhoff said the governor and other South Dakota officials should accept that the healthcare overhaul will be implemented.
"It's going to be the law of the land. We can't just bury our heads in the sand and pretend it's not happening," Hunhoff said.