PHOENIX (Reuters) - Arizona Governor Jan Brewer said on Wednesday she was rejecting a major provision of President Barack Obama's healthcare reform law that calls for creating state-based health insurance markets where consumers can purchase private, federally subsidized coverage. Citing lingering questions about the plan and operating costs she said would be passed on to families and small businesses, Brewer, a Republican, said Arizona would join at least 16 other states in opting instead for a federally run health insurance exchange. Such networks are designed to function as online insurance markets where the uninsured can shop for private health plans offered at federally subsidized rates, and are an integral provision of the Affordable Care Act, a centerpiece of Obama's first term in office. Brewer, along with many other Republicans, has been an outspoken critic of Obama's healthcare overhaul initiative, calling it an "overreaching and unaffordable assault on states' rights and individual liberty." Seventeen states plus the District of Columbia have told the Obama administration they intend to move ahead with their own exchanges, while Arizona became the latest of 17 states to reject the plan outright in favor of a federally based exchange, according to the Kaiser Family Foundation, which has closely tracked the issue. Most of those opting out are states in the Midwest or South. Six more states have sought to join with HHS in setting up a hybrid federal-state network, and 10 states remain undecided, the foundation said. Republican Mitt Romney, who lost to Obama in the November 6 presidential election, had vowed to repeal the law if elected. Acknowledging that the law had been upheld as constitutional by the U.S. Supreme Court, and despite her advocacy of greater local control, Brewer said her state would be better off ceding management of a system she said would be dominated by the federal government in any case. "I have come to the conclusion that the state of Arizona would wield little actual authority over its 'state' exchange," she said. Although startup costs of exchanges are to be borne by the federal government, Brewer said Arizona stood to incur $27 million to $40 million in operating expenses starting in 2015, and that those costs would be passed along in the form of higher premiums to policy holders. Brewer, who has clashed sharply with the Obama administration on a number of issues, especially immigration policy, made her intentions known in a one-page letter to HHS on Wednesday. The state, which also has a Republican-controlled Legislature, had spent millions of dollars in federal grant money over the past several months laying the groundwork for the possible creation of a healthcare exchange. Brewer faced heavy lobbying from some conservative Republicans who opposed setting up a state-run exchange, while a number of business groups and healthcare organizations favored creating one. State Democrats also strongly support a state-run exchange. One top Democratic lawmaker criticized Brewer for "an irresponsible decision" that wasted millions of dollars already spent preparing for a state-run exchange. "The governor is going to throw that all away so she can push an extremist agenda," state House of Representatives Minority Leader Chad Campbell said. We've come to expect political grandstanding from her, but this is a whole new level. Campbell said in a statement the state exchange that Brewer rejected would be a plus for consumers, giving them more of a say over their healthcare decisions. "The governor just signed over a lot of power to the federal government," he added. Reporting by David Schwartz; Writing by Steve Gorman; Editing by Cynthia Johnston and Peter Cooney