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UPDATE 5-U.S. states plan suit to block Trump Obamacare subsidies cut

* New York, California, other states plan lawsuit

* Democrats accuse Trump of sabotaging 2010 law

* Trump frustrated that Congress failed to dismantle law (Adds planned lawsuits, Schumer comments)

WASHINGTON, Oct 13 (Reuters) - A coalition of U.S. states lined up on Friday to sue to block President Donald Trump's move to scrap a key component of Obamacare, subsidies to health insurers that help low-income Americans pay out-of-pocket medical expenses.

One day after the administration announced plans to end the payments, Trump said he would dismantle Obamacare "step by step," even as his latest action raised concerns about chaos in insurance markets.

Trump's action took aim at a critical component of the 2010 law, his Democratic predecessor Barack Obama's signature domestic policy achievement. Frustrated by the failure of his fellow Republicans who control Congress to repeal and replace Obamacare, Trump has taken several steps to chip away at it.

The administration will not make the next payment to insurers, scheduled for Wednesday, Attorney General Jeff Sessions said. The subsidies cost $7 billion this year and were estimated at $10 billion for 2018, according to congressional analysts.

The Democratic attorneys general of New York and California were joining forces with several other states, including Kentucky, Massachusetts and Connecticut, to file a lawsuit in federal court in California. The states will ask the court to force Trump to make the next payment, Massachusetts Attorney General Maura Healey, a Democrat, told reporters.

The new lawsuit would be separate from a case pending before an appeals court in the District of Columbia in which 16 Democratic state attorneys general are defending the legality of the payments.

About 10 million people are enrolled in Obamacare through its marketplace, and most receive subsidies. Trump's action came just weeks before the Obamacare open enrollment period begins on Nov. 1 for 2018 insurance policies through the law's marketplace.

Democrats accused Trump of sabotaging the law. But Senate Democratic leader Chuck Schumer expressed optimism about chances for a deal with Republicans to continue the subsidy payments.

"We're going to have a very good opportunity to get this done in a bipartisan way" during negotiations in December on broad federal spending legislation, "if we can't get it done sooner," Schumer told reporters.

Hospitals, doctors, health insurers, state insurance commissioners and patient advocates decried Trump's move, saying consumers will ultimately pay the price. They called on Congress to appropriate the funds needed to keep up the subsidy payments.

Trump, who as a candidate last year promised to roll back the law formally called the Affordable Care Act, received applause for his latest action during an appearance on Friday before a group of conservative voters.

"It's step by step by step, and that was a very big step yesterday," Trump said. "And one by one, it's going to come down, and we're going to have great healthcare in our country."

He said he was taking "a little different route than we had hoped" because of Congress' inability to act. Republicans for seven years had vowed to get rid of Obamacare, but deep intra-party divisions have sunk their efforts to get legislation through the Senate.

"A BROKEN MESS"

Trump on Friday called Obamacare "a broken mess" and urged Democrats to reach out to him to make a deal.

"The Democrats ObamaCare is imploding," he said in a Twitter post. "Massive subsidy payments to their pet insurance companies has stopped. Dems should call me to fix!"

Since taking office in January, Trump has made the monthly subsidy payments, which he had called a "bailout" for insurance companies.

Trump had threatened many times to cut the subsidies. Health insurers that planned to stay in the Obamacare market prepared for the move in many states by submitting two sets of premium rates to regulators: with and without the government subsidies.

The National Association of Insurance Commissioners said Trump's move would drive up premium costs for consumers by at least 12 percent to 15 percent in 2018 and cut more than $1 billion in payments to insurers for 2017.

The American Medical Association, the nation's largest group of doctors, said it was "deeply discouraged" by the subsidies cut-off.

AMA President David Barbe said the move "creates still more uncertainty in the ACA marketplace just as the abbreviated open enrollment period is about to begin, further undermining the law and threatening access to meaningful health insurance coverage for millions of Americans."

Health insurers' stocks took a hit on Friday, with Centene Corp and Molina Healthcare both sinking about 3 percent. Hospital shares also fell, with Tenet Healthcare down 4 percent and Community Health Systems down 3 percent.

"The effect of the order is likely to be profoundly destabilizing, disruptive and potentially materially damaging to hospitals and those exchange plans who are still required to offer benefits despite the loss of the cost-sharing reduction (CSR) payments," Mizuho analyst Sheryl Skolnick wrote in a research note.

Health plans still in Obamacare exchanges will incur immediate, potentially big losses, and some will rapidly exit the marketplaces, Skolnick wrote.

Hospital operators should expect debts to rise in 2018 as their co-pays and deductibles go unfunded, she added.

The White House announced the cut-off just hours after Trump signed an order intended to allow insurers to sell lower-cost, bare-bones policies with limited benefits and consumer protections.

Republicans have called Obamacare an unnecessary government intrusion into the American healthcare system. Democrats have said the law needs some fixes but noted that it had brought insurance to 20 million people.

The White House said that based on Justice Department guidance, it concluded it could not lawfully pay the subsidies because "there is no appropriation for cost-sharing reduction payments to insurance companies under Obamacare."

(Additional reporting by Jeff Mason, Steve Holland, Makini Brice, Lawrence Hurley and Susan Heavey in Washington, Megan Davies in New York, Brendan O'Brien in in Milwaukee and Divya Grover in Bengaluru; Writing by Will Dunham; Editing by Bernadette Baum and Lisa Von Ahn)