As Governing first wrote about last week, a drafting error in the Affordable Care Act (ACA) will allow millions of people in states that don’t expand Medicaid under the law to instead purchase private insurance with the help of a federal tax subsidy. That oversight is also playing a key role in health reform proposals in two conservative states offered as alternatives to Obamacare.

To recap: The ACA expected states to expand Medicaid eligibility to 138 percent of the federal poverty level, about $15,000 for an individual. But the Supreme Court’s ruling last June made the expansion optional. But thanks to a mistake in the law’s drafting, eligibility for tax subsidies to buy private coverage on the health insurance marketplaces created by the law starts at 100 percent of the poverty line.

The upshot? In the 14 states that have said they won’t expand Medicaid, people above the poverty line will still be able to purchase private insurance using federal tax subsidies, which they wouldn’t have been able to do if the law was written correctly.

A few red states, most notably Wisconsin, are positioned to actually scale back Medicaid eligibility to take advantage of that loophole, as Governing also reported last week.

Now officials in two more states -- Missouri and South Carolina -- are using the loophole as a way to cover more people and drive down health care costs without putting more people into public insurance.

Here’s what they want to do.

In Missouri, State Rep. Jay Barnes, a Republican, has proposed what he calls “Market-Based Medicaid.” The key provision would set Medicaid eligibility at 100 percent of the poverty line for all residents, which would bring into the fold low-income childless adults, a population typically excluded from the program. Everybody above that threshold – including some parents and children who are now enrolled in Medicaid -- would get coverage through the insurance marketplaces and tax subsidies.

Private managed-care companies would then compete to sell their products to Medicaid’s enrollees, who would be able to choose between high-deductible plans (commonly known as health savings accounts) or prepaid co-pay plans, and receive an electronic card to track their usage . The proposal would encourage enrollees to seek less expensive primary care for routine health needs, rather than going to the emergency room, by repaying them a portion of their unused deductible or co-pays leftover at the end of the year. Barnes’ plan would also require the maximum amount of cost-sharing allowed under federal law, meaning enrollees would pay up to $8 for prescriptions and $4 for specialist doctor visits.

Barnes, who filed the legislation Tuesday, touts his plan as a market-based alternative to the ACA. He also says the 100 percent threshold for federal tax subsidies in the law, the unintentional loophole uncovered by Governing last week, played a key part in how he crafted it. By allowing people to buy private coverage without any extra effort from the state, it’s actually a central piece of his plan.

“This would give Missouri the most market-based health system in the country,” Barnes says. “I was entirely conscious of that. I took that into mind in where I drew the line.”

Whether Barnes’ plan makes it through to become law remains to be seen. Democratic Missouri Gov. Jay Nixon has said he supports the Medicaid expansion, but he’s working with a Republican legislature that seems set against it. Barnes will sell the plan by hyping its expected savings: at least $741 million in the next eight years, according to his office’s projections.

The U.S. Department of Health and Human Services (HHS) would have to sign off on most of the legislation’s reforms. Barnes also included one other provision that could complicate things: he wants the 100 percent federal funding match for everybody enrolled in Medicaid under his plan. That was part of the sweetened deal that was supposed to persuade states to expand the program under the ACA, but HHS has previously said that states could receive the enhanced funding only if they expanded Medicaid eligibility to 138 percent of the poverty line.

Barnes alleges that decision was all about politics. If the White House is serious about expanding health coverage and controlling costs, he says, they’ll reconsider. And if Missouri doesn’t get that money, he’ll drop the plan and fewer people will be insured.

“The Obama administration is going to have to get serious about working with red state solutions. So this proposal is all-or-nothing,” Barnes says. “But this is also a creative solution that should appeal to a federal government interested in bringing down the cost of health care.”

In South Carolina, where the Medicaid expansion has been rejected, state officials are leaving Medicaid alone, but still looking for ways to improve care and lower costs for people below the poverty line who won’t benefit from federal tax subsidies under the ACA. More than 375,000 of them will likely remain uninsured because the state is not expanding Medicaid, according to estimates from the Kaiser Family Foundation.

They’ve come up with a multi-tiered plan to do it. It starts with setting aside $35 million to help steer uninsured patients away from the emergency room and into less expensive health care clinics. The plan sets aside another $10 million to support those primary care providers serving the uninsured, including reimbursements for uncompensated care and grants to improve their facilities.

The plan is funded through a $62 million recurring surplus in the state health department's budget. Other elements of the proposal include increasing the state’s telemedicine capacity and encouraging new doctors, through medical school loan repayments among other things, to set up practices in underserved rural areas.

Critics of the plan, including state Democrats and some hospitals, say the plan wouldn't be as comprehensive as the actual Medicaid expansion: It doesn't increase insurance coverage and it forgoes federal Medicaid funds for which the state would be eligible. But Republican officials argue it’s a sound alternative to the ACA, which will improve health care for the poor without the financial burden that comes with the expansion (which they estimate to be $1 billion over 10 years, after the 100 percent federal match gradually phases down to 90 percent in later years).

And because of the federal law’s loophole, South Carolina Health and Human Services Secretary Tony Keck tells Governing that state officials were able to focus their efforts on the uninsured below the poverty line -- they knew those above it would be covered by private insurance with the help of tax subsidies.

"Insurance is not always the way to make sure people are the healthiest," Keck says. "This helps us to target the people with the most need. We're already spending a lot of money on the uninsured. This will help us manage it more responsibly."