The latest to roll out are ObamaCare’s insurance “exchanges,” which will go live in 2014. On Monday the Health and Human Services Department released draft regulations telling the states how they must run these organizations, which are the core of the new entitlement and are where people will receive heavily subsidized coverage. HHS Secretary Kathleen Sebelius and the rest of the Obamacrats are using the language of choice and flexibility to sell their handiwork, but this is the triumph of euphemism over reality.

In principle, an exchange isn’t the worst idea, and a transparent clearinghouse might even command bipartisan support. The individual and small-business insurance markets in the states are often patchy and opaque. A portal like an exchange could help restore price discovery to health care by allowing consumers to weigh costs against benefits and encouraging competition on insurance value. Utah built a pilot exchange on this model in 2009, though the results so far are mixed and the rules are still being fine-tuned.

HHS, unsurprisingly, envisions the exchanges as 50 (or more) new regulatory agencies designed to let politics run health markets, while letting Washington give orders to the states. The word “require” appears 811 times in the 244-page rule and its 103-page supplement. “Must” shows up 580 times—and this is merely HHS’s first batch of exchange mandates.

Speaking of unknowing, try to decipher this passage: “The intent of this proposed rule is to afford States substantial discretion in the design and operation of an Exchange. Greater standardization is proposed where required by the statute or where there are compelling practical, efficiency or consumer protection reasons.” Guess which of the impulses in those contradictory sentences won out?

The draft rules command that the structure of every exchange needs federal approval, much as in Medicaid, which in practice means an HHS veto of market-based innovation. State standards for the “certification, recertification, and decertification of health plans” will also be subject to HHS. This means Washington will dictate rules about which insurers are allowed to sell plans in the exchange, and thus which insurers will continue to exist as viable commercial concerns. It also looks as if HHS will require the exchanges to enforce de facto price controls on premiums.

This is the exchange model that prevails in Massachusetts, where Mitt Romney’s “connector” has become a tool for controlling the insurance industry and picking health-care winners and losers. But at least the Bay State adopted the connector voluntarily, if unwisely. HHS is conscripting the states as its agents, directing their resources and making them complicit in the insurance disruptions to come.

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Ms. Sebelius’s false gesture toward federalism—states can do whatever they want, as long as they want to do exactly what she wants—also comes with a killer caveat: If states don’t set up an exchange, or the exchange they create doesn’t clear HHS scrutiny, HHS will impose its own version. The details of this federal fallback will come in a future regulation, timetable indefinite.

Many of our right-leaning friends are encouraging Republicans to refuse to set up an exchange, as an act of civil disobedience. In that sense HHS’s delusions of competence could be a gift: As the agency has been implementing this defective law over the last year, it has made things even worse than they needed to be.

The dilemma for Governors is that their states are full of real insurance businesses and customers, and thus they have a responsibility to try to mitigate some of the regulatory damage. A posture of indifference is tempting, but it also means an all but certain death warrant for businesses and jobs when HHS eventually takes over.

A poorly designed exchange could send many insurers into a death spiral of unpayable claims, hastening consolidation, reducing competition, and increasing the political demand for government to run everything. This was precisely the goal of many Democrats who wrote the Affordable Care Act, and we suspect it is also HHS’s motivation.

A better option is to resist strangulating federal control by fighting HHS over the shape and role of the exchange. Indiana’s Mitch Daniels and 21 other governors specifically asked HHS for more exchange flexibility in February, though their letter went unanswered and the substance, obviously, went unheeded.

Today more than ever, rationalizing U.S. health care means fighting on many fronts, and the GOP doesn’t have a chance if it walks off the field. Governors—and Republicans in Congress—should be telling voters how bad the new HHS rule is and the damage it will do if it is implemented.