Fabien Levy, a spokesman for HHS, said in an email that the department wants to work with states to find options that work.
"HHS is committed to supporting state flexibility and working with states to design Medicaid programs that work for them, within the confines of the law," Levy said.
Branstad spokesman Tim Albrecht said the governor supports the deal because it includes health incentives for some participants and because the state could opt out if the federal funding is not provided.
"Taxpayers are protected in the event that federal funding falls through," Albrecht said.
Branstad had previously opposed expanding Medicaid, arguing that the cost was unsustainable for the federal government. He also questioned the quality of Medicaid care. But he softened that stance earlier this week, saying he could consider taking the dollars if he had "assurances" that taxpayers wouldn't get stuck holding the bill.
Iowa's approach shares some similarities with Arkansas, which is seeking to use federal Medicaid dollars to purchase private insurance for 250,000 low-income residents.
Democratic Senate President Pam Jochum, of Dubuque, Iowa, said the plan was a compromise brokered by lawmakers from both chambers.
Under the deal, people with incomes up to 100 percent of the poverty line—or up to $11,490 for an individual—would go on a state-run health plan. People with incomes from 101 to 138 percent of poverty — up to $15,856 per individual — would get private health plans through the new online healthcare marketplaces, called exchanges. Their premiums will be paid for with the federal dollars.
Jochum said the state would need to seek a federal waiver for the plan and would accept federal funding offered to states that expand Medicaid. Under Obama's healthcare plan, the federal government would pay the full cost for the new enrollees during the first three years of the expansion, and then 10 percent of the cost would gradually be shifted to the state.
The estimated 150,000 recipients of the new plan would likely be poor residents who don't qualify for Medicaid, mostly childless adults. Some of those people are on an existing state program that will expire later this year.
The state would be able to opt out of the coverage responsibilities if the federal government doesn't honor the financial commitment. And some participants will have to follow some health incentives, or risk paying a percentage of their costs, Jochum said.
Senate Democrats had pushed for a Medicaid expansion, while Branstad had proposed an alternative plan that used state and federal funds to cover a smaller pool of people.