U.S. President Donald Trump moved to undermine Obamacare dramatically late on Thursday by cutting off subsidies to health insurance companies for low-income patients, sparking threats of legal action and concern of chaos in insurance markets.

The decision is the most dramatic action Trump has taken yet to weaken the Affordable Care Act, former president Barack Obama's signature health-care law, which extended insurance to 20 million Americans.

The move drew swift condemnation from Democrats and threats from state attorneys general in New York and California to fight back with lawsuits.

Trump has been frustrated by Republicans' failure to repeal and replace the law known as Obamacare, thwarting a promise he made during the 2016 campaign.

Likely to please base

His decision is likely to please those among his political base who detest the Obamacare system, which many Republicans have attacked for years as an unneeded government intrusion in Americans' health care.

In a nod to that same constituency, the president signed an executive order earlier on Thursday to make it easier for Americans to buy bare-bones health insurance plans.

Democrats Nancy Pelosi and Chuck Schumer said Trump would single-handedly push Americans' health-care premiums higher. (Getty Images)

Senate Democratic leader Chuck Schumer and House Democratic leader Nancy Pelosi derided the subsidies cut-off in a joint statement, saying Trump would single-handedly push Americans' health-care premiums higher.

"It is a spiteful act of vast, pointless sabotage levelled at working families and the middle class in every corner of America," they said. "Make no mistake about it, Trump will try to blame the Affordable Care Act, but this will fall on his back and he will pay the price for it."

Payments worth billions

Insurers and proponents of Obamacare have implored Trump for months to commit to making the payments, which are worth billions of dollars. Several insurers have cited uncertainty over the payments in hiking premiums for 2018 or exiting insurance markets altogether.

Health-care stocks have edged lower in recent days. Ending the payments could hurt shares of insurers such as Anthem Inc, Molina, Cigna Corp and Centene, which are offering plans on Obamacare markets for 2018.

The Healthcare.gov website is seen on a laptop computer earlier this year. The White House said late on Thursday that it could not lawfully pay subsidies to the Affordable Care Act anymore. (Alex Brandon/Associated Press)

Trump has made the payments, guaranteed to insurers under Obamacare to help lower out-of-pocket medical expenses for low-income consumers, each month since taking office in January.

But he has repeatedly threatened to cut them off and disparaged them as a "bailout" for insurance companies.

'Dangerous, partisan campaign'

The White House said late on Thursday that it could not lawfully pay the subsidies anymore.

A White House statement said that based on guidance from the Justice Department, "the Department of Health and Human Services has concluded that there is no appropriation for cost-sharing reduction payments to insurance companies under Obamacare."

Our coalition of states stands ready to sue... - New York Attorney General Eric T. Schneiderman

"In light of this analysis, the Government cannot lawfully make the cost-sharing reduction payments," it said.

New York Attorney General Eric T. Schneiderman said in a statement he was prepared to lead other attorneys general in a lawsuit.

"I will not allow President Trump to once again use New York families as political pawns in his dangerous, partisan campaign to eviscerate the Affordable Care Act at any cost," he wrote.

Subject of lawsuit

The payments are the subject of a lawsuit brought by House Republicans against the Obama administration that alleged they were unlawful because they needed to be appropriated by Congress.

A judge for the federal district court for the District of Columbia ruled in favour of the Republicans, and the Obama administration appealed the ruling.

The Trump administration took over the lawsuit and had delayed deciding whether to continue the Obama administration's appeal or terminate the subsidies, but in April Trump began threatening to stop the payments. That case became more complicated in August when a U.S. appeals court allowed 16 Democratic state attorneys general to defend the payments and have a say in the legal fight.

The political turbulence has affected insurers' decisions.

Other steps to undermine Obamacare

Anthem Inc, one of the largest remaining Obamacare insurers, in August scaled back its offerings in Nevada and Georgia and blamed the moves in part on uncertainty over the payments.

Blue Cross and Blue Shield of North Carolina earlier this year raised premiums by more than 20 per cent, but said it would have only raised premiums by about nine per cent if Trump agreed to fund the payments.

The nonpartisan Congressional Budget Office estimated that cutting off the insurer payments would cause premiums to rise 20 per cent in 2018, and said that five per cent of Americans would live in areas that do not have an insurer in the individual market in 2018.

Trump has taken a number of other steps to undermine Obamacare.

Last week, the Department of Health and Human Services issued rules that let businesses or non-profit organizations lodge religious or moral objections to obtain an exemption from Obamacare's mandate that employers provide birth control in health insurance with no co-payment.

The administration also slashed the Obamacare advertising and outreach budget and halved the open enrollment period.