(Bloomberg) — Mississippi’s application to run its own health-insurance exchange was denied by the Obama administration, which cited a dispute between the state’s insurance commissioner and governor over the Patient Protection and Affordable Care Act.

The Department of Health and Human Services will reject the application and encourage the state to instead join a federal partnership for running the exchanges, Gary Cohen, director of the department’s Center for Consumer Information and Insurance Oversight, said in a letter to Mississippi Insurance Commissioner Mike Chaney. Exchanges are marketplaces to sell health insurance to people without it, set to open Oct. 1.

The rejection of Mississippi’s application is the first time the administration has turned down a state’s request to set up its own exchange. Seventeen states and the District of Columbia have been approved to create state exchanges. About 7 million people are expected to get insurance through a state or federal exchange in 2014.

“With a lack of support from your governor and no formal commitment to coordinate from other state agencies, we do not see a feasible pathway to conditionally approving a state-based exchange,” Cohen writes Mississippi’s insurance commissioner.

Chaney had submitted a bid to build one of the insurance markets as part of PPACA without the support of Gov. Phil Bryant, who opposes the health law and didn’t want to help enact it. Chaney and Bryant are both Republicans.

Chaney argues that Mississippi would be better off controlling the exchange itself, rather than allowing the federal government to build one in the state. The dispute between Chaney and Bryant appears to be unique in the country.

The Obama administration indicated last year that Chaney could pursue an exchange without Bryant’s support. Bryant said in a letter to Health and Human Services Secretary Kathleen Sebelius on Dec. 28 that only he — as governor — could decide whether Mississippi would build its own exchange. Mississippi’s attorney general, Jim Hood, issued a legal opinion on Jan. 15 that Chaney could proceed on his own, according to the Jackson, Miss., Clarion-Ledger.

The exchanges “are not free market” and will cause higher taxes and swelling enrollment in state Medicaid programs for the poor, Bryant says in a statement.

“I firmly maintain my position that Mississippi will not willfully implement a mechanism that will compromise our state’s financial stability,” he says.

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