BOISE - Gov. Butch Otter concedes he misspoke last week by suggesting Idaho could lose $300 million in federal Medicaid funding if it doesn't adopt an insurance exchange required by Congress' 2010 health care overhaul.

Otter's gaffe set off a brief political flurry as it raised hackles among conservative foes who thought he was resorting to brinksmanship to scare lawmakers into backing insurance exchange plans.

This week, the Republican governor clarified that if lawmakers opt against establishing a state-run exchange with $20.3 million in federal help, the federal government would establish one - all without Medicaid money at risk.

Otter, whose initial comment was to reporters on Jan. 5, now says he intended to say: Idaho risks losing federal Medicaid money if it fails to complete a separate system to process Medicaid applications by an October 2013 deadline. That system, called Medicaid Readiness, will help determine whether people are eligible for Medicaid, or if they qualify for subsidized insurance provided through an exchange.

"I must have left the impression it was the insurance exchange," Otter said late Wednesday. "That's simply not right."

While Medicaid Readiness will be integrated into a state-run or federally-run exchange, it isn't part of the exchange.

And Idaho has every intention of completing Medicaid Readiness, via a $3.48 million appropriation it expects to get through the Department of Health and Welfare's fiscal year 2013 budget request, said agency director Dick Armstrong.

"That's in the current budget," Armstrong said. "That's the match required."

Exchanges were envisioned by the health care reforms as transparent, online marketplaces where individuals and small businesses could compare and shop for coverage.

Otter's Jan. 5 comment suggested the stakes for not setting up a state exchange were high, since a $300 million loss in federal Medicaid money for the poor, elderly and disabled would require a tax increase for Idaho to make up the money.

Here are his actual words:

"We are at risk in many cases of our present participation levels, which is generally 70-30 on Medicaid," Otter told reporters, referring to the rate which the federal government provides Medicaid funding relative to Idaho's share.

"By and large, we feel there is a constant threat under the Affordable Health Care Act, that should we not go forward with an insurance exchange, we could see the federal state participation go to a 50-50, instead of a 70-30," he continued. "The costs of that are upward of $300 million, to the state of Idaho."

Otter's statement caught House Minority Leader John Rusche, D-Lewiston, by surprise.

A former insurance company executive and state-run exchange supporter, Rusche says he almost immediately called the governor's office for a clarification.

Meanwhile, groups fighting an exchange including the Idaho Freedom Foundation, the free-market think tank behind the failed 2011 efforts to nullify Congress' overhaul, cried foul.

Wayne Hoffman, the group's leader, fired off a letter to Idaho newspapers, contending he'd never heard of anything like what Otter had suggested.

"Maybe somebody gave him bad information," Hoffman said Thursday. "All I know is, we've been monitoring this issue since 'Obamacare' passed, and we knew there was no connection between the Medicaid matching rate and the state's decision to implement the exchange or not to implement the exchange."

As the exchange debate intensifies, Otter appears to be distancing himself from what once appeared to be his strong support of using the $20.3 million federal grant for a state-run exchange.

Though his Department of Insurance director, Bill Deal, is worried Idaho insurers like Blue Cross and Regence Blue Shield or regional insurer PacificSource could be shut out of participating in a federal version, Otter clearly is monitoring opposition from "Obamacare"-bashing House conservatives intent on rejecting the $20.3 million as he seeks to avoid siding with a measure that may be destined to fail.