RIM Reports Loss as It Cuts Jobs, Delays BlackBerry 10

By Hugo Miller - Jun 29, 2012 4:53 AM GMT+0700

Research In Motion Ltd. (RIMM), losing ground to Apple Inc. (AAPL) and Google Inc. (GOOG), said it will delay the BlackBerry 10 phone release, cut 5,000 jobs and posted a quarterly loss that was five times bigger than projected.

The stock plunged 22 percent after the company reported a first-quarter loss of 37 cents a share, excluding some items. Analysts had estimated a 7 cent loss, according to data compiled by Bloomberg. Sales tumbled 43 percent to $2.8 billion, missing an estimate of $3.05 billion.

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RIM, which stopped giving sales and profit forecasts last quarter, has failed to keep up with the capabilities of Apple’s iPhone and Android devices, prompting customers to flee the BlackBerry platform. The company is working on an operating system with better Web and touch-screen features -- a lineup that now won’t arrive until the first quarter of next year, more than a year later than originally planned.

“The delay may just be the final nail in the coffin,” said Sameet Kanade, an analyst at Northern Securities in Toronto who has a sell rating on the stock. “This is not just a disappointing quarter, but is a big question mark about the company going forward.”

Stock Slide

RIM fell as low as $7.14 in late trading after closing at $9.13. The stock had already lost more than two-thirds of its value in the past 12 months and had fallen almost 95 percent from its stock market peak in mid-2008, cutting the business’s market value to $4.79 billion.

The job cuts will shrink the workforce by about 30 percent, cutting it from 16,500 to 11,500 by March, RIM said.

The company also reported a pretax writedown of $335 million and said it expects to report an additional operating loss in the second quarter. The first-quarter net loss was $518 million, or 99 cents a share, compared with a profit of $695 million, or $1.33, a year earlier.

RIM’s plummeting stock price has spurred investors to demand a shakeup in strategy, with some shareholders seeking a breakup or merger. Chief Executive Officer Thorsten Heins said in May that RIM had hired JPMorgan Chase & Co. (JPM) and RBC Capital Markets to help evaluate its strategic options.

At the time, RIM forecast an operating loss for the first quarter and said it was streamlining operations by reducing spending and headcount. The company is trying to save $1 billion in annual operating costs by eliminating workers and manufacturing sites.

‘Not Satisfied’

“I am not satisfied with these results and continue to work aggressively with all areas of the organization and the board to implement meaningful changes to address the challenges, including a thoughtful realignment of resources,” Heins, 54, said today in a statement. “Our top priority going forward is the successful launch of our first BlackBerry 10 device.”

Even before the latest results, some investors were pushing RIM to put itself on the block.

“We would like to see a sale of the company or a breakup, and if a breakup, the sale of each of the parts,” Vic Alboini, chairman of the Toronto-based investment firm Jaguar Financial Corp. (JFC), said last month. He sees Microsoft Corp. (MSFT) or International Business Machines Corp. as potential buyers.

“We’re pushing and cajoling RIM to get to the promised land of a sale or breakup,” he said.

One bright spot is RIM’s cash balance, Kanade said today. The company’s cash, equivalents and short- and long-term investments rose to $2.2 billion last quarter, from $2.1 billion in the previous three months.

“The only saving grace is they have cash of $2 billion, but they’ll start burning that,” he said.

Market Share

The company’s share of the global smartphone industry fell by more than half to 6.4 percent in the first quarter, according to research firm IDC. Android, an operating system developed by Google and shared with manufacturers, jumped to 59 percent, while Apple’s iOS operating system accounted for 23 percent.

U.S. BlackBerry defections remain high, RIM said today on a conference call.

“Their business is being squeezed by Apple and Android,” said Scott Sutherland, an analyst at Wedbush Securities in San Francisco who has a neutral rating on RIM.

RIM had previously said that the first of the new BlackBerry 10 phones would come out in the latter part of this year, without giving a more specific time frame. And the product was originally expected in the first quarter of 2012. Pushing the BlackBerry 10 to 2013 means it could come out months later than Apple’s iPhone 5 and products built on Microsoft Corp.’s Windows 8 platform.

RIM said it shipped 7.8 million BlackBerrys and 260,000 PlayBook tablets in its last fiscal quarter, which ended June 2. Analysts had projected 8.8 million smartphones and 280,000 tablets, according to a survey of 10 analysts. A year earlier, RIM shipped 13.2 million BlackBerrys and 500,000 PlayBooks.

“Outside of breaking apart the business and trying to maximize the value for the pieces,” Sutherland said, “it’s going to be very, very difficult for them.”

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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Apple Says Riccio to Run Hardware as Bob Mansfield Retires

By Adam Satariano - Jun 29, 2012 8:29 AM GMT+0700.

Apple Inc. (AAPL), the world’s most valuable company, said Dan Riccio will take over as head of hardware engineering to succeed Bob Mansfield, who plans to retire in the coming months.

Riccio is currently the vice president in charge of iPad hardware engineering, the Cupertino, California-based company said today in a statement. Mansfield joined Apple in 1999 through an acquisition.

Mansfield worked closely with Apple design chief Jony Ive to ensure that products, including the iPhone, iPad and Mac, functioned as well as they looked. Riccio, a Mansfield lieutenant, has worked closely on the iPad from the start, Apple said. In two years, Apple has used the iPad to become the leader in tablets, a market that DisplaySearch predicts will reach $66.4 billion this year.

“Bob has been an instrumental part of our executive team, leading the hardware engineering organization and overseeing the team that has delivered dozens of breakthrough products over the years,” said Tim Cook, Apple’s chief executive officer, said in the statement. “We are very sad to have him leave and hope he enjoys every day of his retirement.”

Mansfield was often featured in Apple’s promotional videos, talking about the company’s engineering accomplishments.

His retirement is the first major executive departure at Apple since retail head Ron Johnson left last year to become CEO of J.C. Penney Co. Johnson was replaced by John Browett, the former CEO of Dixons Retail Plc. (DXNS)

Keeping Talent

In the case of Mansfield’s retirement, Cook is selecting an internal replacement. Riccio, who joined in 1998, “has been a key contributor to most of Apple’s hardware,” Apple said. He earned a bachelor’s degree in mechanical engineering from the University of Massachusetts at Amherst in 1986, Apple said.

One of Cook’s biggest challenges is retaining top employees, especially many who have become rich as Apple’s share price has risen, said Shaw Wu, an analyst at Sterne Agee & Leach Inc. Mansfield filed in February to sell 30,000 Apple shares worth $13.6 million, according to regulatory filings.

Promoting an internal candidate like Riccio brings a new generation of leadership to the company, Wu said. Mansfield has been in charge of Mac hardware engineering since 2005 and took over supervision for Apple’s mobile devices in 2010.

“You need for the next generation of leaders to give them incentives to stay and show a path for growth,” Wu said.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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States Confront Tough Choice on Medicaid Funds After Ruling

By William Selway and Alex Wayne - Jun 29, 2012 4:19 AM GMT+0700

The U.S. Supreme Court ruling on President Barack Obama’s health-care overhaul forces Republicans in states that opposed the measure to make a difficult choice.

If the states go along with an expansion of the Medicaid program, they get federal money that covers the bulk of the costs. In doing so, they would also have to embrace a portion of a law that they rejected as unconstitutional or too costly.

The law was designed to open the state-run program to an estimated 17 million low-income Americans by forcing states to loosen income limits for those who can qualify. The court modified the measure by saying the federal government can’t threaten to withhold existing money from states that don’t fully comply with the Medicaid expansion.

“There’s probably a small group, at least initially, who won’t do it,” said Ray Scheppach, the former executive director of the National Governors Association who is now a professor of public policy at the University of Virginia in Charlottesville. “It’s part political. It’s part fiscal. There’s pressure on them both ways.”

Republicans won control of the majority of governorships in the 2010 elections, when concern about the expanded role of government under Obama boosted turnout among the party’s voters. Republican state leaders have opposed Obama’s 2010 Patient Protection and Affordable Care Act, and today criticized the Supreme Court’s decision to uphold the core of the law, which requires individuals to obtain health insurance.

‘Unaffordable’ Expansion

Republican leaders of states that challenged the health- care law in court -- including Texas, Florida, Virginia, Ohio and Indiana -- say they’re not sure their states will opt in.

Florida Attorney General Pam Bondi, a Republican, called a Medicaid expansion “massive” and “unaffordable.”

“We will have a choice on Medicaid, which is good,” Bondi told reporters outside the state Capitol in Tallahassee. “We do have to decide what to do and we have to do it very quickly.”

Texas Health and Human Services Executive Commissioner Tom Suehs said the state is analyzing the ruling to decide how to proceed.

“I’m pleased that it gives states more ability to push back against a forced expansion of Medicaid,” he said in a statement.

Cost Issue

Virginia Governor Robert McDonnell, the chairman of the Republican Governors Association, told reporters in Richmond that he is considering the ruling and hasn’t made any decisions. He said the expansion of Medicaid, which now consumes about one- fifth of the state budget, will cost the state an added $2.2 billion over the next decade.

“That’s going to be a vast expansion in the amount of money going from the general fund,” he said.

The Medicaid expansion would cost states $21 billion through 2019, according to the Kasiser Commission on Medicaid and the Uninsured, a non-profit group that researches health care. The federal government would contribute $444 billion, the group said in the report.

The Medicaid program has put added financial pressure on states after the longest recession since the Great Depression as more residents were thrown out of work. As tax revenue tumbled, states were forced to close more than $500 billion of budget gaps.

Party Divide

Following the Supreme Court’s decision, Republican state leaders issued statements faulting a program they said ceded an excessively large role to the federal government. Congressional Republicans vowed to repeal the law, as did Mitt Romney, the former Massachusetts governor and Republican presidential candidate.

Democrats celebrated the ruling. Illinois Governor Pat Quinn said his state will expand the Medicaid program. “We want everybody in, nobody left out,” he told reporters.

The law signed by Obama expands Medicaid to cover all Americans earning as much as 133 percent of the federal poverty level, or about $30,657 for a family of four this year, overruling eligibility rules that now vary by state.

The federal government would pay 100 percent of the costs of the expansion until 2017. After that, states’ share of the expansion rises to a maximum of 10 percent of the cost.

Should a state choose not to expand Medicaid, that may affect coverage for those who earn too much to qualify for the program and won’t receive subsidies offered under the law. Insurance for that group may be prohibitively expensive.

Coverage Gap

“Very low income people may be covered,” said Bruce Siegel, president and chief executive officer of the Washington- based National Association of Public Hospitals and Health Systems. “Lower middle-class and above may be covered. You could potentially have this group of people around the poverty line, millions of people, who are sort of out of luck.”

With pressure in Washington to curb the federal government’s budget deficits, state leaders may decide not to expand Medicaid out of concern that Congress might force them to cover more of the costs, said Marjorie Baldwin, a professor of economics at Arizona State University who tracks health care.

“Given the current state of state budgets, we could expect some states would decide they can’t do that,” she said.

While some states may decide against expanding Medicaid, most will likely choose to do so given that the bulk of the funding will come from the federal government, said I. Glenn Cohen, an assistant professor at Harvard Law School who follows health-care policy.

Political Reasons

“It’s possible that some governors will, mostly for political reasons, do it, but I still suspect most governors will decide to expand Medicaid in keeping with what the federal government wants to do,” he said. “The deal Congress has offered them going forward is really, really good.”

The law marks the biggest change to the U.S. health system since Medicare and Medicaid were established in 1965. It was designed to expand coverage to at least 30 million people -- primarily by expanding Medicaid and setting up markets where consumers could buy insurance -- while controlling the soaring costs of health care.

The law was challenged by 26 Republican-controlled states and a small-business trade group. They contended the measure exceeded Congress’s constitutional powers to regulate interstate commerce and impose taxes.

The challenge focused on the insurance mandate, which requires Americans to get coverage by 2014 or pay a penalty. The concept was championed by Republicans years ago as an alternative to Democratic proposals for a single government-run health system.

To contact the reporters on this story: William Selway in Washington at wselway@bloomberg.net; Alex Wayne in Washington at awayne3@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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EU Approves Jobs, Growth Plan With 10 Billion-Euro EIB Boost

By Rebecca Christie - Jun 29, 2012 4:03 AM GMT+0700

European Union leaders approved a 120 billion-euro ($149 billion) plan to promote growth in the 27-nation bloc that includes a capital boost for the European Investment Bank.

The government chiefs agreed on a 10 billion-euro capital increase for the EIB today as a centerpiece of the long-term growth plan, which includes infrastructure financing, tax-policy pledges and more focused use of EU funding. It also calls for project bonds and support of small and medium-sized businesses.

“The growth agenda is a sign of our unrelenting commitment,” EU President Herman Van Rompuy said in a press conference in Brussels on the first day of a two-day summit. “It brings together all concrete measures that we will swiftly take.”

The growth plan came before leaders took on the thornier measures to prevent the euro area’s financial crisis from swamping Spain and Italy. They’ll discuss buying Spanish and Italian government bonds to bring down borrowing costs that are near euro-era records, Finnish Prime Minister Jyrki Katainen said. He also proposed that bailout funds buy collateralized government debt in primary markets.

Van Rompuy said other elements of the growth-promoting strategy, such as those dealing with financial stability and the future of the euro, have not yet been finished.

The leaders will continue meeting tonight to discuss the long-term future of the EU and its 17-nation common currency. “We are making progress,” he said, adding that debate on short-term measures isn’t blocking the path to agreement. Leaders also continue to discuss an EU patent, he said.

Merkel Endorsement

German Chancellor Angela Merkel endorsed the growth plan before the meeting started, calling it “a good program, especially in terms of future-oriented investment and above all in terms of more job opportunities especially for young people.”

The Luxembourg-based EIB could use its capital infusion to increase its lending capacity by 60 billion euros and unlock 180 billion euros of additional investment, according to EU estimates.

With the extra capacity, the EIB can keep expanding its efforts to finance EU infrastructure projects. In January, the bank said it was on course to gradually return to pre-2008 lending levels, with loans set to decline to 50 billion euros in 2012 from 61 billion euros in 2011.

The capital increase comes with a pledge to make sure EIB loans reach “the most vulnerable countries,” according to draft conclusions circulated ahead of the meeting. At the same time, documents sent to leaders last week by EIB President Werner Hoyer and European Commission President Jose Barroso say the EIB won’t abandon its lending standards.

AAA Model

“The increased activity should not compromise the EIB’s fundamental AAA-based business model,” said the commission-EIB report on joint lending priorities, obtained by Bloomberg News.

“While EIB has a countercyclical role to play and is ready to do all it can to support growth and jobs at this difficult moment, the EIB cannot be seen as and should not become a crisis-management tool, nor a bailing out instrument,” the report said.

Hoyer said the extra 180 billion euros in investments would take place between 2013 and 2015 if the EIB gets the extra capital, in an interview published today in Les Echos. Over the next three to four years, the EIB could make additional loans and investments on innovation, strategic infrastructure, resource efficiency projects and access to finance for small and medium-sized entities, the report said.

Spanish Prime Minister Mariano Rajoy said in Brussels today that the EIB needs to finance smaller companies as part of needed reforms for European growth.

-- With assistance from Joao Lima, James G. Neuger, Tony Czuczka and Robert Hutton in Brussels. Editor: Patrick G. Henry, Matthew Brockett

To contact the reporters on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net;

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net;

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Demands for Bond-Buying Agreement Roil European Summit

By Rebecca Christie and Andrew Frye - Jun 29, 2012 7:11 AM GMT+0700

European Union leaders struggled to meet demands by Spain and Italy for relief from rising borrowing costs, threatening to derail a 120 billion-euro ($149 billion) pledge to boost economic growth.

Leaders from the 17 euro nations stayed on to debate the crisis-fighting plan early this morning after all 27 nations informally signed off on the growth strategy. Italy is withholding its final endorsement of the initiative as it pushes for collective action at an EU summit in Brussels to push down its bond yields, said two Italian officials who spoke on the condition that they not be named.

EU President Herman Van Rompuy said talks weren’t gridlocked and will continue through the night and later today.

“We haven’t yet a conclusion on the growth agenda because we have to discuss also the aspects of financial stability and we do this related to the discussion also foreseen” on the future of the euro, Van Rompuy told reporters late yesterday.

Italian officials said they were surprised by his remarks, signaled it sought a broader deal that includes immediate action on lowering borrowing costs. Germany has opposed any effort to join forces on sovereign debt or expand the crisis-fighting role of the European Central Bank.

French President Francois Hollande said Italy and Spain ought to receive support from the euro area’s firewall funds and that their yields are still too high after the efforts they’ve made to reform their economies. Spain’s 10-year yields breached 7 percent and Italy auctioned 10-year securities at the highest yields since December yesterday.

Hollande’s Concern

Hollande said the growth remarks “aren’t enough” and that he’ll withhold endorsement of an EU fiscal pact, which was endorsed by his predecessor, Nicolas Sarkozy in December, at least until the end of the two-day summit.

“The euro zone cannot stay in the current circumstance, without a budgetary union and even more without a banking union,” Hollande told reporters.

Stocks fell in early Asian trading on concern a breakdown in Europe’s crisis-fighting effort may deepen a slowdown in the world’s second-biggest economic bloc. The MSCI Asia Pacific Index slid 0.3 percent at 9:01 a.m. in Tokyo.

Finnish Prime Minister Jyrki Katainen proposed that bailout funds buy collateralized government debt in primary markets. His proposal joined discussion of whether the euro area’s rescue fund should aid banks directly and the role of the ECB, which has already bought more than 200 billion euros of government bonds and pumped more than 1 trillion euros of three-year loans into the banking system. It shelved its bond-purchase program earlier this year.

‘Concrete Measures’

European Union Economic and Monetary Affairs CommissionerOlli Rehn said the ECB’s actions have prevented the crisis from worsening. He also called for “concrete measures” to help Italy and Spain and more debate about mutualized public debt.

“The ECB has played a key role in safeguarding financial stability,” Rehn said in an interview with Bloomberg Television. “We respect the independence of the ECB, but they have played a key role so far in fighting off the crisis.”

To contact the reporters on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net; Andrew Frye in Brussels at afrye@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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U.S. Stocks Pare Losses on Bets Europe Nearing Debt Pact

By Rita Nazareth and Julia Leite - Jun 29, 2012 4:12 AM GMT+0700

U.S. stocks pared losses in the final hour of trading amid speculation European leaders were nearing an agreement to halt contagion from the debt crisis.

After the market close, European Union President Herman Van Rompuysaid leaders agreed to spend 120 billion euros ($149 billion) to stimulate growth. JPMorgan Chase & Co. (JPM) tumbled 2.5 percent after the New York Times said trading losses from credit derivatives may total as much as $9 billion, exceeding the firm’s initial estimate. Health-care (S5HLTH) stocks in the Standard & Poor’s 500 Index fell 0.3 percent as the Supreme Court upheld the core of President Barack Obama’s industry overhaul.

The S&P 500 dropped 0.2 percent to 1,329.04 at 4 p.m. New York time, paring a loss of as much as 1.4 percent. The Dow Jones Industrial Average slid 24.75 points, or 0.2 percent, to 12,602.26. Volume for exchange-listed stocks in the U.S. was 6.8 billion shares, about in line with the three-month average.

European leaders began a two-day summit in Brussels today intended to chart a path out of their financial crisis. Stocks pared losses as German Chancellor Angela Merkel canceled a press briefing and her spokesman said talks on a growth accord were ongoing.

“Europe has been the driver of this market,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “The postponement of a conference call was a signal for traders to put on more risk. Another ‘kick the can’ would be viewed as favorable.”

Economic Data

Equities tumbled earlier today as the number of applications for unemployment benefits hovered last week near the highest of the year, showing little improvement in the labor market. The U.S. economy grew 1.9 percent in the first quarter, reflecting a gain in consumer spending that now shows signs of cooling as the labor market weakens.

Concern about a worsening of Europe’s debt crisis and a global slowdown has taken the S&P 500 (SPX) down 5.6 percent this quarter. Technology and financial shares have had the biggest losses in the period, tumbling at least 9.6 percent.

Financial shares in the S&P 500 dropped 0.2 percent, paring a loss of as much as 1.9 percent. Barclays Plc’s record $451 million fines for interest rate manipulation sent bank shares plunging as U.S. and U.K. authorities pursue sanctions in a global investigation of more than a dozen lenders.

JPMorgan slumped 2.5 percent to $35.88. The New York Times reported that the lender’s losses have increased in recent weeks as it sought to exit its holdings, citing unidentified former traders and executives at the bank.

‘Major Loss’

JPMorgan won’t have a “major loss” in 2012 following the lender’s disclosure of losses from credit derivatives that could amount to more than $2 billion this quarter, Richard Bove said.

“We’re not expecting JPM to run a major loss,” Bove, an analyst with Rochdale Securities LLC, said today in a Bloomberg Television interview with Tom Keene. “I don’t believe that there’s any likelihood that the liquidity of the company is going to be affected by this.”

Citigroup Inc. (C) dropped 2.6 percent to $26.39, trimming a decline of as much as 5.4 percent. The bank is not one of the lenders being investigated by the U.K.’s Financial Services Authority for attempting to manipulate the London interbank offered rate, the company said in an emailed statement today.

Tenet Healthcare Corp. (THC) led hospitals and Medicaid insurers higher while commercial health plans led by WellPoint Inc. (WLP) fell after the U.S. Supreme Court upheld most of President Barack Obama’s health-care overhaul.

Tenet Rallies

Tenet, the third-biggest hospital chain, rose 5.4 percent to $5.25, while Medicaid plan Molina Healthcare Inc. (MOH) climbed 8.6 percent to $23.16. Indianapolis-based WellPoint, the second- largest U.S. health insurer, declined 5.2 percent to $65.90.

Cisco Systems Inc. (CSCO), the largest maker of computer- networking gear, slipped 1.5 percent to $16.48 after Lazard Ltd. said in a note today that the company may be seeing weaker-than- expected demand trends.

Family Dollar Stores Inc. (FDO) slumped 2.8 percent to $67.20. The owner of more than 7,200 discount shops in the U.S. narrowed its fiscal 2012 profit forecast. Rival Dollar Tree Inc. (DLTR) retreated 2.4 percent to $52.18, while Dollar General Corp. (DG) declined 0.5 percent to $53.73.

News Corp. (NWSA) dropped 1.4 percent to $21.99, after climbing 11 percent over the previous two days. It announced plans to split into two publicly traded entities focused on publishing and entertainment after shareholder pressure prompted the biggest reorganization since Rupert Murdoch built the media empire.

In Talks

Genworth Financial Inc. rallied 11 percent to $5.43. The life insurer and mortgage guarantor surged as hedge fund Highfields Capital Management LP said it is in talks with management about increasing the value of its stake.

U.S. executives are tapping into their record pile of cash for the first time in four years as they drive spending on plants and equipment to an all-time high.

Cash held by S&P 500 companies, excluding financial institutions and utilities, fell 1.4 percent to $1.01 trillion in the first quarter, according to data compiled by Howard Silverblatt, a New York-based senior index analyst at S&P. Capital spending, based on 12-month trailing data compiled by Bloomberg for the entire index, rose 3.3 percent during the same period and reached a record $66.6 billion last month.

While record-low interest rates may have prompted companies to build more factories, concern over the European debt crisis and expiration of Bush-era tax cuts will make executives reluctant to keep increasing spending, said David Sowerby, a money manager at Boston-based Loomis Sayles & Co.

‘Great Concern’

“It will only persist to the extent that companies remain reasonably confident in the business outlook,” Sowerby, whose firm oversees about $170 billion, said in a telephone interview. “With the great concern in Europe as well as the pending expiration of the tax cuts, you could see a return to rebuilding cash and less capital expenditure.”

Companies amassed $1.03 trillion in cash at the end of last year after beating analysts’ earnings estimates for 12 straight quarters, data compiled by S&P and Bloomberg show. Combined profits by S&P 500 stocks rose 9.9 percent to a record $92.09 a share in 2011, Bloomberg data show.

Executives are seeking ways to give back money to shareholders. While share buybacks fell by 6.2 percent to $84.3 billion in the first quarter from a year earlier, dividends increased by 14 percent to $64.1 billion, S&P data show.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Julia Leite in New York at jleite3@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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Obama’s Health-Care Overhaul Upheld by U.S. Supreme Court

By Greg Stohr - Jun 29, 2012 4:03 AM GMT+0700

Pete Marovich/Zuma Press

Supporters of the healthcare law react to the ruling from the Supeme Court on the constitutionality of the Affordable Care Act.

The U.S. Supreme Court upheld the core of President Barack Obama’s health-care overhaul, giving him an election-year triumph and preserving a law that would expand insurance to millions of people and transform an industry that makes up 18 percent of the nation’s economy.

The justices, voting 5-4, said Congress has the power to make Americans carry insurance or pay a penalty. That requirement is at the center of the law, which also forces insurers to cover people with pre-existing medical conditions. The court limited the law’s extension of the Medicaid program for the poor by saying the federal government can’t threaten to withhold existing funds from states that don’t fully comply.

The ruling frames the health-care issue for this year’s elections and is a victory of symbolism as well as substance for Obama. Chief Justice John Roberts, a Republican appointee, joined four Democratic-selected justices to give Obama a majority on a law that has divided the country along ideological and partisan lines throughout his presidency.

Roberts, writing for the court, said Congress had the authority to impose the insurance requirement under its power to levy taxes. “Because the Constitution permits such a tax, it is not our role to forbid it or to pass upon its wisdom or fairness,” he wrote.

Longest Arguments

“The highest court in the land has now spoken,” Obama said afterward in a televised statement from the White House.

The president saw incorrect television reports that the law has been struck down -- before a staff member relayed that it had been upheld, said an administration official who asked for anonymity to describe the private meeting.

“We will continue to implement this law,” and search for improvements, Obama said on TV. “What we won’t do, and what the country can’t afford to do, is re-fight the political battles of two years ago or go back to the way things were.”

The decision on the Patient Protection and Affordable Care Act is the climax to a legal fight that featured the longest high court arguments in 44 years, a record number of briefs and extraordinary public interest in a Supreme Court case. The case tested both the constitutional powers of Congress and the willingness of the Roberts court to overrule the other two branches of the federal government.

Republican-appointed Justices Antonin Scalia, Anthony Kennedy, Clarence Thomas and Samuel Alito dissented, saying they would have struck down the entire statute.

‘Liberty at Peril’

“The fragmentation of power produced by the structure of our government is central to liberty, and when we destroy it, we place liberty at peril,” the dissenters wrote. “Today’s decision should have vindicated, should have taught, this truth; instead, our judgment today has disregarded it.”

Among the majority, Justices Ruth Bader Ginsburg and Sonia Sotomayor voted to uphold the entire statute. Justices Stephen Breyer and Elena Kagan agreed with Roberts in limiting the Medicaid expansion.

Kennedy and Ginsburg each took the unusual step of reading a summary of their opinion from the bench. All told, the justices took more than an hour to announce the ruling before a packed courtroom that included members of Congress, retired Justice John Paul Stevens and Solicitor General Donald Verrilli, the Obama administration lawyer whose defense of the law drew criticism.

Roosevelt’s Fight

The dispute marked the first time the Supreme Court had considered a president’s defining legislative accomplishment in the middle of his re-election campaign. The court hadn’t taken up a law of comparable scope since the justices overturned part of the National Industrial Recovery Act in 1935 during President Franklin Roosevelt’s New Deal.

The law marks the biggest change to the U.S. health system since Medicare and Medicaid were established in 1965. It was designed to expand coverage to at least 30 million people -- primarily by expanding Medicaid and setting up online markets where consumers could buy insurance -- while controlling the soaring costs of health care.

Republicans, including presidential candidate Mitt Romney, have called for its repeal. “What the court did not do on its last day in session, I will do on my first day if elected president of the United States. And that is: I will act to repeal Obamacare,” Romney said in Washington.

‘Urgency’ of Repeal

Obama’s health-care law “puts the federal government between you and your doctor,” Romney told reporters. Though he pushed through a similar plan when he was Massachusetts governor, he has said such a law isn’t wise nationally.

Republicans in Congress seized upon the court’s description of the no-coverage penalty as a tax. House Majority Leader Eric Cantor, a Virginia Republican, scheduled a vote on on repeal for July 11.

“Now we will let the American people decide if they want this huge tax burden,” said Representative Joe Walsh, of Illinois, one of 87 Republican freshmen elected in 2010.

“The president’s health-care law is hurting our economy by driving up health costs and making it harder for small businesses to hire,” House Speaker John Boehner, an Ohio Republican, said in a statement.

The law was challenged by 26 Republican-controlled states and a small-business trade group. They contended the measure exceeded Congress’s constitutional powers to regulate interstate commerce and impose taxes.

Insurance Mandate

The challenge focused on the insurance mandate, which requires Americans to get coverage by 2014 or pay a penalty. The concept was championed by Republicans years ago as an alternative to Democratic proposals for a single government-run health system.

Roberts accepted the Republicans’ commerce argument, while voting to uphold the mandate under Congress’s taxing power.

While the federal government “does not have the power to order people to buy health insurance,” Roberts wrote, “the federal government does have the power to impose a tax on those without health insurance.” The law “is therefore constitutional because it can reasonably be read as a tax.”

Roberts said that, for most Americans, the amount of the penalty will be far less than the cost of insurance.

“It may often be a reasonable financial decision to make the payment rather than purchase insurance,” he wrote. “Although the payment will raise considerable revenue, it is plainly designed to expand health insurance coverage. But taxes that seek to influence conduct are nothing new.”

Roberts Legacy

The ruling will shape Roberts’s legacy as much as Obama’s. The 57-year-old chief justice -- whose 2005 nomination Obama opposed as a senator -- has been a leader of the court’s conservative wing on other issues.

The Medicaid expansion was designed to extend eligibility to those with incomes up to 138 percent of the federal poverty line. States that didn’t comply with the new expansion would have lost all or part of their federal Medicaid funds.

Roberts said Congress can require states to meet conditions to receive new Medicaid money, though it can’t take away existing funding. He said Medicaid spending accounts for more than 20 percent of the average state’s total budget, with the federal government covering at least half those costs.

“The financial ‘inducement’ Congress has chosen is much more than ‘relatively mild encouragement’ -- it is a gun to the head,” Roberts wrote. “What Congress is not free to do is to penalize states that choose not to participate in that new program by taking away their existing Medicaid funding.”

Industry Impact

The ruling removes some of the uncertainty the health industry had faced about the future of government policy. By upholding the individual mandate, the court left intact a provision that will give insurers such as UnitedHealth Group Inc. (UNH) millions of relatively healthy, low-cost policyholders.

Other parts of the law will help the drug industry, including the Medicaid expansion and the system of online insurance markets that will make it easier for people to buy policies. Hospitals also may benefit from the expansion, as will insurers that focus on managing states’ Medicaid programs, including Amerigroup Corp. (AGP) and Centene Corp. (CNC)

Hospital companies led by HCA Holdings Inc. (HCA) jumped in New York trading, and Medicaid insurers paced by Molina Healthcare Inc. (MOH) rose. Commercial carriers such as WellPoint Inc. (WLP) fell in the face of the law’s new regulations. HCA, the biggest U.S. hospital chain, rose 11 percent to $29.47 at the close of New York trading.

Preventive Care

Tenet Healthcare Corp. (THC), the third-biggest chain, closed with a gain of 5.4 percent, while Long Beach, California-based Molina rose 8.6 percent. Indianapolis-based WellPoint, the second-largest U.S. health insurer, fell 5.2 percent to close at $65.90.

Some parts of the law have already gone into effect, including provisions that close a gap in prescription-drug coverage under Medicare, allow 2.5 million young adults to stay on their parents’ insurance until age 26, and provide free mammograms, colonoscopies and flu shots.

The health-care measure’s enactment in March 2010 marked the culmination of decades of efforts by Democrats and Republicans alike to put in place a universal health-care program. For Obama, congressional approval marked a victory that had eluded presidents from Harry Truman to Bill Clinton.

Passage in the Democratic-controlled Congress came only after months of lobbying, deal-making and parliamentary maneuvering. In the end, not a single Republican voted in favor of the law. The measure passed the House by a 219-212 tally.

From the beginning, the law divided the public, with opposition fueling the Tea Party movement and helping produce the 2010 Republican takeover of the House. A Bloomberg National Poll conducted in March found that 37 percent of respondents said the law should be repealed, 11 percent said it should be left alone and 46 percent said it may need small modifications.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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