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UPDATE 1-Court allows Democratic states to defend Obamacare payments

(Adds details on court order, background)

WASHINGTON, Aug 1 (Reuters) - A U.S. appeals court on Tuesday allowed Democratic state attorneys general to defend subsidy payments to insurance companies that are a critical part of the Obamacare healthcare law.

The U.S. Court of Appeals for the District of Columbia Circuit granted a motion filed by the 16 attorneys general, led by California's Xavier Becerra and New York's Eric Schneiderman.

President Donald Trump, frustrated that he and fellow Republicans in Congress have been unable to keep campaign promises to repeal and replace Obamacare, has threatened to cut off the payments.

The subsidies help cover out-of-pocket medical expenses for low-income Americans.

The case, which dates back to the Obama administration, was filed by the Republican-led House of Representatives against the federal government in an effort to block the subsidy payments to insurers for the individual plans created by the Affordable Care Act, popularly known as Obamacare.

The court's decision allows Democrats who back the law to have a say in the legal fight.

"The states have shown a substantial risk that an injunction requiring termination of the payments at issue here ... would lead directly and imminently to an increase in insurance prices, which in turn will increase the number of uninsured individuals for whom the states will have to provide health care," the order issued by a three-judge panel said. All three judges are appointees of former Democratic President Barack Obama.

"In addition, state-funded hospitals will suffer financially when they are unable to recoup costs from uninsured, indigent patients for whom federal law requires them to provide medical care," the court order said.

Trump has repeatedly threatened to withhold the payments to insurers, which amount to about $7 billion this year, and referred to them as a "bailout."

The attorneys general cited in their May court filing Trump's own words vowing to let Obamacare "explode" as part of the reasoning for their intervention. (Reporting by Lawrence Hurley; Editing by Sandra Maler and Peter Cooney)