The expansion was originally required as part of the health care law, but the U.S. Supreme Court ruled in June that the federal government cannot penalize states that refuse to participate. Expanded Medicaid is also backed by the health care industry and advocates for low-income residents.
Republican U.S. Sen. Mike Johanns said in a statement Thursday that Heineman made the right decision.
"When it comes to the president's health care law, saying anything is state run is simply a misnomer," Johanns said. "The reality is that the federal government will wholly dictate how the exchange operates."
Supporters of the state-run exchange have argued that Nebraskans would be best served with a local program tailored to the state's needs.
Bruce Rieker, a lobbyist for the Nebraska Hospital Association, said his group would not try to overturn the governor's decision. Instead, he said, the state's hospitals will focus on lobbying the federal government for as much flexibility as possible.