The long-awaited regulations, released by the Department of Health and Human Services, are intended to provide state lawmakers and officials flexibility on federal deadlines as they meet the complex task of building state and regional insurance markets before a January 1, 2014, deadline.

In a 642-page final rule, the government provides guidance on how states should establish exchanges, qualify health plans for participation and determine the eligibility of both individuals and small business that want to use exchanges to provide health coverage to their employees.

Industry and consumer groups welcomed the regulations, saying they provided states with the flexibility necessary to meet consumer needs for choice and quality protections. They also said the regulations shift policy focus to the state level, where the new rules must be implemented.

State exchanges are part of a two-pronged effort to provide health coverage for about 30 million uninsured Americans under the Patient Protection and Affordable Care Act, which also calls for a dramatic expansion of the joint federal-state Medicaid program for the poor.

The exchanges amount to federally subsidized state-run insurance markets designed to operate like Amazon.com by providing consumers Web-based access to affordable health plans that meet minimum quality standards.

But how state exchanges perform could be determined by a high profile Supreme Court case in which 26 states and a business group claim healthcare reform should be overturned as unconstitutional because it requires most adults to buy private health insurance or pay a penalty.

That requirement, known as the individual mandate, is intended to limit insurance risk in the exchanges by ensuring that younger, healthier adults participate. Otherwise, analysts say, the exchanges could become dominated by older, sicker adults, which would mean higher costs and fewer participating plans.

The Supreme Court will hear oral arguments March 26-28 and is expected to issue a ruling by July 1.

Many states have delayed participation until the ruling is out. About 33 states have received federal grant money to help set up exchanges.

The new rule retains a January 1, 2013, deadline for state exchanges to meet federal standards but also would allow states to qualify after January 1 if they can prove their exchanges will be ready to offer open enrollment by October 1, 2013.

The federal government will establish its own exchanges in states that fail to meet standards in time.

The administration is still working on a national regulation to establish essential health benefits that insurance plans must provide to participate in the exchanges.

Mike Russo, policy analyst at the public interest group US PIRG, said the new rules give states substantial leeway in establishing exchanges. But he called on state governments to exceed minimum requirements to negotiate on rates and coverage on behalf of consumers.

The insurance group America's Health Insurance Plans said it would be important to avoid duplicating existing state laws as exchanges develop, warning that duplication would add to complexity and increase costs for consumers.

(Reporting by David Morgan; Editing by Gary Hill)

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