Capital Thinking ~ December 10, 2012

General Legislative
On Tuesday, December 11, the House will meet at noon for morning hour and at 2:00 for
legislative business. The House will consider a Motion to go to Conference on H.R. 4310 –
National Defense Authorization Act for Fiscal Year 2013 and Democratic Motion to Instruct
Conferees. On Wednesday, December 12, and Thursday, December 13, the House will meet to
consider the following legislation under suspension of the rules: H.R. 6190 - Asthma Inhalers
Relief Act of 2012; H.R. 5817 - Eliminate Privacy Notice Confusion Act, as amended; S. 3542 - No-
Hassle Flying Act of 2012; S. 1998 - DART Act, as amended; H.R. 6364 - Frank Buckles World War I
Memorial Act, to be amended; H.R. 4053 - Improper Payments Elimination and Recovery
Improvement Act of 2012; S. 3315 - GAO Mandates Revision Act of 2012; and S. 1379 - D.C. Courts
and Public Defender Service Act of 2011.

The Senate will convene on Monday, December 10, and resume consideration of the motion to
proceed to S. 3637, the TAG extension legislation.

Fiscal Cliff
In a December 3 letter to the President, House Republicans submitted their counteroffer to the White
House’s fiscal cliff proposal. The Republican proposal offers $2.2 trillion in new revenues and spending
cuts – roughly $500 billion more than the amount proposed by the President. House Republicans reach
the $2.2 trillion figure through: (i) $800 billion in new revenues in the course of 2013 tax reform; (ii) $300
billion in discretionary savings; (iii) $600 billion in savings from healthcare programs; (iv) $300 billion from
other mandatory spending; and (v) $200 billion through revisions to the Consumer Price Index (CPI)
inflation calculation method, providing for a chained-CPI. The counteroffer indicates that Erskine Bowles’
November 1, 2011, testimony before the Joint Select Committee on Deficit Reduction (the “Super
Committee”) was used as the basis for the offer.

From the White House, in the days following the November 29 meetings between Treasury Secretary
Geithner and Republican Leadership, more specifics on the Administration’s initial $1.6 trillion proposed
tax increase and spending reductions (and stimulus spending program) were released. Per Administration
officials, $1.6 trillion of net tax increases would occur in two steps: (1) the first trillion up front by virtue of
allowing upper-income Bush tax cuts to expire on earned and investment income, along with changes to
the estate tax, with (2) the remainder in a tax reform process to be completed by August 1, 2013.

The White House also clarified that their proposal includes a host of corporate revenue raisers. While the
corporate policies have long been part of the President’s budget proposals, they were not previously part
of fiscal cliff discussions. Specific targets include: reforming the international tax system (raising $150
billion), repealing Last In First Out (LIFO) accounting ($75 billion), repealing certain oil and gas
preferences ($30 billion), reinstating Superfund taxes ($20 billion), changing the tax treatment of financial
and insurance products ($17 billion), and taxing carried interest as ordinary income ($13 billion).

Patton Boggs Capital Thinking Weekly Update | December 10, 2012
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Initial reports from Congressional Republicans indicated that the Administration offered $400 billion in
entitlement cuts that would occur next year, while Administration officials have told the press that the
proposal would accomplish $600 billion in spending reductions. (It is unclear what accounts for this $200
billion discrepancy – there is some conjecture that the Administration is proposing $400 billion in net
spending savings.) Under the White House plan, entitlement reform would also be set to occur by August
1, 2013. Further, the Administration proposed delaying the sequester until August 1, 2013, using that
date as a means to press Congress to action on tax and entitlement reform.

While speaking to a group of CEO’s last week, the President suggested that a deal to avert the fiscal cliff
was possible within a week. “Another way of putting this is we can probably solve this in about a week. It's
not that tough, but we need that conceptual breakthrough,” the President said. The goal still appears to
be a roughly $4 trillion deficit reduction agreement, which is the level necessary to stabilize the debt to
GDP ratio at roughly 3 percent moving forward and is viewed by many as a sign to the markets that
Congress and the Administration are serious about tackling long-term debt. However, any agreement will
likely count as savings the $2 trillion pocketed last year by virtue of enactment of the Budget Control Act.

In terms of the structure of a possible year-end compromise, the shape of a deal still appears likely to
follow the contours of what has been suggested publicly in the past – a down payment on deficit reduction
drawn from both tax increases and mandatory spending reductions, coupled with greater measures to
follow next year through fundamental tax and fundamental entitlement reform. Assuming such a deal
materializes; expect to see an extension of the Bush tax cuts for most taxpayers, with some form of tax
increases on certain upper-income taxpayers.

As recent events suggest, however, it remains to be seen whether the Republicans’ position of limiting
deductions and exclusions or the President’s position of marginal rate increases (or a combination of
both) will prevail. Many believe the solution to the existing impasse lies somewhere between current tax
rates and Clinton-era rates, coupled with caps on deductions and exclusions. However, in exchange for a
possible 36-37 percent top rate, Republicans will demand significant entitlement reform, spending cuts,
and tax reform. In that regard, Republicans continue to maintain that there must be spending cuts
included in any year-end deal. (Programs that could be under consideration for purposes of a down
payment include SNAP, social security disability and, perhaps, even the manner by which the social
security COLA is calculated.) And, others suggest that certain economic stimulus items should be
included, such as unemployment insurance, some alternative to the current payroll tax cut, and
supplemental funding to provide relief for areas hit hardest by Hurricane Sandy.

In-line with stages proffered by the Administration’s current proposal, the construct of any deal will likely
contain a process for expedited action next year for both tax and entitlement reform, with an agreed upon
revenue target for tax reform and an agreed upon savings from mandatory spending (mostly
entitlements). Presumably, Senate Finance and House Ways and Means will be tasked with filling in a
broad structure, though some working parameters might be outlined in advance (again, the magnitude of
the up-front savings could be relatively small or very large depending on a final negotiation). Should tax
and entitlement reform fail to be signed into law within a time certain, it is unclear whether there would be
legislative trigger or “backstop” to compel action next year, aside from reversion to current law, and what
such a trigger might look like.

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Any deal on this scale will likely include a debt ceiling increase, along with the assorted priorities that
Congress still needs to address for 2012 and 2013 (e.g., AMT patch, tax “extenders,” doc fix, Medicare
extenders, etc.). However, these pieces are not likely to move this year absent a deal of some sort that
averts the fiscal cliff, as their fates are linked to broader negotiations.

Finally, it is highly probable that a deal will also delay the spending sequester, but it remains unclear
whether that would be paid for with revenue and/or spending cuts over and above the “down payment” or
whether additional pay-fors will be used to pay for a delay.

Agriculture & Food
LEGISLATIVE ACTIVITY

 Farm Bill. Last week, Farm Bill negotiations continued between the Senate and House
Agriculture Committee leaders. Although Senator Debbie Stabenow (D-MI) continues her efforts
to include a five-year Farm Bill in the deficit reduction package, House Agriculture Committee
Ranking Member Collin Peterson (D-MI) may now be leaning towards a one-year extension that
includes a new dairy program. As stated in last week’s version of Capital Thinking Weekly, House
Agriculture Committee Chairman Frank Lucas (R-OK) continues to view a one-year extension
favorably.

 House Agriculture Committee GOP Members. On Wednesday, December 5, House
Republicans appointed seven new Congressmen to the House Agriculture Committee:
Representatives Dan Benishek (MI); Chris Collins (NY); Rodney Davis (IL); Jeff Denham (CA);
Richard Hudson (NC); Doug LaMalfa (CA); and Ted Yoho (FL). For the remaining Republican
seat, the leadership will likely look to appoint a Member from a southern state.

 Upcoming Hearings. On Thursday, December 13, the House Agriculture Committee will hold a
hearing on “Dodd-Frank Derivatives Reform: Challenges Facing U.S. and International Markets.”

REGULATORY ACTIVITY

 Federal School Lunch Nutrition Standards. The Department of Agriculture will announce that it will
change the minimum and maximum serving ranges for whole grains and proteins in response to
concerns from Members of Congress, school district leaders, and other stakeholders about the
implementation of the final rule on nutrition standards for school meals. The changes will allow for
additional flexibility by allowing schools to meet just the minimum serving requirements for whole
grains and proteins to comply with the standards, even if schools have exceeded the maximum
serving requirements. We expect the Department’s Food Nutrition Service to release a policy
memorandum early this week that will discuss the changes in further detail.

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Budget, Appropriations

 Supplemental Appropriations for Disaster Relief. On Friday, President Obama requested $60.4
billion in emergency supplemental appropriations to Congress to address Hurricane Sandy recovery
efforts. The request includes $11.5 billion for the Disaster Relief Fund; $17 billion for the Department
of Housing and Urban Development’s Community Development Block Grant; $9.7 billion for the
National Flood Insurance Program; $11.7 billion for public transportation infrastructure; $4 billion for
the Army Corps of Engineers; and $750 million for the Small Business Administration’s Disaster
Loans Program. While lower than the $82 billion recovery costs currently estimated by officials in New
York, New Jersey, and Connecticut, the request will face intense scrutiny by Congress over the next
couple of weeks. Impacted Congressional delegations and the White House would like to pass the
measure during the lame duck session, keeping its consideration separate from the ongoing fiscal cliff
negotiations. Conservative Republicans, however, will push for offsets, making it possible the
recovery package will become ensnared in the broader spending reduction discussion. Some
Republicans have recommended the supplemental funding be provided in more than one tranche to
allow for smaller funding allocations that would be more easily supported by Conservatives.

 Defense Appropriations Bill Ready. House and Senate Appropriators reconciled the FY 2013
Defense Appropriations bill and will likely attach it to any supplemental emergency appropriations
measure that moves in the lame duck. Passage of any other appropriations bill or omnibus measure
before the end of the year remains unlikely.

Cybersecurity

 Cybersecurity Legislation. Incoming House Homeland Security Committee Chairman Michael
McCaul (R-TX) stated last week that his top legislative priority in the next Congress will be
cybersecurity legislation. To prepare for his upcoming work on a cybersecurity bill, he plans to spend
the next few months meeting with industry stakeholders, including technology companies and critical
infrastructure owners and operators, in order to get their views on important provisions that should be
included in a cybersecurity bill next year. Representative McCaul also plans to travel with other
members of the House Homeland Security Committee to sites where critical infrastructure is located
in order to learn more about the cybersecurity measures currently in place in these sectors.
Representative McCaul has yet to announce who will lead the subcommittee that will handle
cybersecurity issues in the next Congress, given that former House Homeland Security

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Subcommittee on Cybersecurity Chairman Representative Dan Lungren (R-CA) was defeated in the
November election.

EXECUTIVE BRANCH ACTIVITY

 Executive Order. Since the Congress is not likely to take up cybersecurity legislation in the last few
weeks of this session, the Obama Administration continues its work on an Executive Order (EO) that
will be focused on cybersecurity issues. We expect the EO to be released in the near future although
some Members of Congress continue to express concerns that issuing an EO instead of passing
legislation is an ineffective way to address current cybersecurity risks.

Education

 Student Loan Reform. Congressman Tom Petri (R-WI), who serves on the House Education and the
Workforce Committee, plans to introduce a bill next week to overhaul the federal student loan
program. The bill is not likely to gain support from many Democrats. Although the bill will not move
during the lame-duck session, Congressman Petri will be able to gather feedback, build support,
make improvements and reintroduce the bill in the new Congress as part of the larger Higher
Education Act reauthorization. The bill would seek to:

o Replace the subsidized Stafford loans with a standard unsubsidized student loan, made
available to everyone

o Create a market variable interest rate set for the life of the loan

o Offer one income-contingent repayment option, equal to 15 percent of borrowers’ annual
discretionary income through paycheck withholdings

o Eliminate loan forgiveness policies in exchange for capping interest on loans at 50 percent

While some Democrats, including Senate Health, Education, Labor, and Pensions Committee
Chairman Tom Harkin (D-IA), may oppose the measure because there is no cap on the variable rate,
House Education and the Workforce Committee Ranking Member George Miller (D-CA) is interested
in the proposal and will likely provide feedback.

 Upcoming Hearings. On Wednesday, December 12, the Senate Judiciary Subcommittee on
Constitution, Civil Rights and Human Rights will hold a hearing on “Ending the School-to-Prison
Pipeline.”

REGULATORY ACTIVITY

 Credit Hour. On Tuesday, December 4, the Carnegie Foundation for the Advancement of Teaching
announced that it will study the Carnegie Unit, which established the time-based measurement of
student learning. The results of the study will likely have implications for measuring student learning

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and may leverage other approaches, including competency-based programs. The study is supported
by a grant from the William and Flora Hewlett Foundation.

 Department of Defense Memorandum of Understanding. On Thursday, December 6, the
Department of Defense issued a revised version of the Memorandum of Understanding (MOU) that
institutions of higher education must sign by March 1, 2013 to participate in military tuition assistance
programs. In April, the Department announced that it would issue a revised MOU based on serious
push back from some institutions of higher education and higher education groups because of
provisions that required institutions of higher education to adhere to the principles and student bill of
rights of the Servicemembers Opportunity College. The recently issued MOU now requires institutions
of higher education to either join Servicemembers Opportunity College or disclose their policies
before servicemembers enroll.

Energy

 Congressional Hearings. On Wednesday, December 12, the House Financial Services Committee
will hold a hearing on “Challenges Facing the U.S. Capital Markets to Effectively Implement Title VII
of the Dodd-Frank Act” (that title covers over-the-counter swaps markets and the regulation of swap
markets); a Senate Finance Subcommittee will hold a hearing on incentives to promote energy
efficiency under tax reform efforts.

REGULATORY ACTIVITY

 LNG Export Study. The Department of Energy (DOE) has released a long-awaited third-party natural
gas exports study. The study concludes that “the benefits that come from export expansion more than
outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG
exports have net economic benefits in spite of higher domestic natural gas prices.” Initial comments
on the study are due by January 24; reply comments will be accepted from January 25 to February
25, 2013. DOE also has invited public comment on the 15 pending export application dockets. The
report and comments will be considered as DOE makes case-by-case “public interest” determinations
on each of those applications. The Department expects to act first on applications that have
commenced the pre-filing Federal Energy Regulatory Commission (FERC) process as of December
5, 2012, in the general order received, and then on the remaining applications in the order received.

 Vehicle Technologies Program. This week, DOE will solicit information from interested stakeholders
to continue promoting and improving the electronic tools it makes available to assist fleets and
consumers in reducing petroleum consumption in vehicles. DOE is particularly interested in receiving
comments and views concerning the availability of DOE’s transportation-oriented electronic tools, as
well as the potential to partner with Internet information providers. Comments should be due by mid-
January.

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 NRC Comment Periods. Comments on the Nuclear Regulatory Commission’s (NRC) proposal to
amend regulations governing low-level radioactive waste disposal facilities are due by January 7,
2013. The preliminary rule change would require new and revised site-specific analyses and would
permit the development of waste acceptance criteria based upon those results. Comments on NRC’s
draft regulatory guidance on Initial Test Programs for Water-Cooled Nuclear Power Plants are due by
January 31, 2013. The guide describes the acceptable scope and depth for initial test programs for
light water cooled plants. Comments on NRC’s plan to revise its Standard Review Plan for the
Review of a License Application for a Fuel Cycle Facility are due by January 7, 2013. Staff has
proposed revising “NUREG-1520” to provide guidance and clarify several technical areas.

 Nuclear Reactor Safety. The Advisory Committee on Reactor Safeguards/Subcommittee on US-
APWR will next meet on January 15, 2013 to discuss topical reports associated with the design
certification of the U.S.-Advanced Pressurized Water Reactor. The Subcommittee on Reliability and
Probabilistic Risk Assessment will next meet on January 16, 2013 to review the progress of Human
Reliability Analysis methods.

 Distribution Transformers. DOE has submitted a new rule on energy efficiency standards for
distribution transformers to the White House Office of Management and Budget (OMB) for review.
DOE agreed to conduct a review and initiate a new rulemaking of energy conservation standards for
liquid-immersed, medium-voltage dry-type, and low-voltage dry-type distribution transformers under a
court settlement. DOE will also clarify the current test procedure for distribution transformers. The
OMB review period typically takes up to 60 days.

Environment

 Energy Efficiency. On Wednesday, December 12, the Senate Committee on Finance Subcommittee
on Energy, Natural Resources and Infrastructure will hold a hearing to examine tax reform and
federal energy policy, focusing on incentives to promote energy efficiency.

 Northeast Corridor. On Thursday, December 13, the House Committee on Transportation and
Infrastructure will hold a hearing concerning the Northeast corridor’s future, including options for high-
speed rail development and opportunities for private sector participation.

REGULATORY ACTIVITY

 DOE and EPA Release Annual Fuel Economy Guide with 2013 Models. The Environmental
Protection Agency (EPA) and the Department of Energy (DOE) have released the 2013 Fuel
Economy Guide in an effort to provide consumers with information to choose the most fuel efficient
and low greenhouse gas emitting vehicles that meet their needs. The 2013 Fuel Economy Guide sets
forth their views about which cars offer the greatest fuel economy and the lowest environmental
impact. This year, for the first time, EPA and DOE have added a second top 10 list of most efficient

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vehicles -- separating advanced technology vehicles from conventional gasoline and diesel vehicles --
so that, in their view, consumers can look up conventional gasoline and diesel models that offer the
most fuel efficiency. The 2013 guide provides an estimated annual fuel cost for each vehicle. The
estimate is calculated based on the vehicle’s miles per gallon (mpg) rating and national estimates for
annual mileage and fuel prices. The 2013 guide also includes a greenhouse gas rating for each
model. The online version of the guide allows consumers to enter their local gasoline prices and
typical driving habits to receive a personalized fuel cost estimate. The guide may be viewed at
www.fueleconomy.gov and it will be available in hard copy at dealer showrooms. All 2013 model year
vehicles will display a new fuel economy and environment label including five-year fuel costs and
savings compared to the average new vehicle, as well as new ratings for greenhouse gas and smog.
These labels are required for model year 2013, but some automakers voluntarily adopted the new
label design on some 2012 models. A complete version of the guide and details on the fuel economy
labels can be accessed at http://www.fueleconomy.gov/ and at http://fueleconomy.gov/m/ for mobile
devices.

 New Members Appointed to EPA’s National Environmental Education Advisory Council. EPA
Administrator Lisa Jackson has appointed 11 environmental education professionals to serve on the
agency’s National Environmental Education Advisory Council (NEEAC). The National Environmental
Education Advisory Council is comprised of representatives from organizations outside the federal
government who provide EPA with advice and recommendations on environmental education. The
council is intended to provide EPA with an understanding of the needs of schools, universities, state
departments of education and natural resources. More information on the NEEAC and the list of new
members can be accessed at: http://www.epa.gov/enviroed/neeac.html. The first meeting of the
NEEAC is scheduled for December 13-14, 2012.

Financial Services

 New Democrats to Join Senate Banking. Senator-elect Heidi Heitkamp (D-ND), Senator-elect
Elizabeth Warren (D-MA), and Senator Joe Manchin (WV) are likely Democrats to join the Senate
Banking Committee next session, filling seats previously held by departing Senators Herb Kohl (D-
WI) and Daniel Akaka (D-HI).

 House Committees to Hold Two Dodd-Frank Implementation Hearings. On Wednesday, the
House Financial Services Capital Markets Subcommittee will hold a hearing with Commodity Futures
Trading Commission (CFTC) Chairman Gary Gensler, Securities and Exchange Commission (SEC)
Division of Trading and Markets Director Robert Cook, the Wholesale Markets Brokers Association,
the Institute of International Bankers, and other interested market participants. On Thursday, the
House Agriculture Subcommittee on General Farm Commodities and Risk Management will hold a
hearing on “Dodd-Frank Derivatives Reform: Challenges Facing U.S. and International Markets.”

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 Senate Banking Committee to Discuss Rental Housing Assistance. On Tuesday, the Senate
Banking Committee will hold a hearing titled “Streamlining and Strengthening HUD’s Rental Housing
Assistance Programs, Part II.” Sandra Henriquez, Assistant Secretary for Public and Indian Housing,
U.S. Department of Housing and Urban Development, will testify.

 House Financial Services Committee to Discuss Volcker Rule Alternatives. On Thursday, the
House Financial Services Committee will hold a hearing titled, “Examining the Impact of the Volcker
Rule on Markets, Businesses, Investors and Job Creation, Part II.” The hearing will explore ideas and
suggestions submitted to Chairman Spencer Bachus (R-AL) on how to formulate a less burdensome
legislative alternative to the Volcker Rule.

REGULATORY ACTIVITY

 SEC Senior Staff Announce Departures. This week, the Securities and Exchange Commission
(SEC) announced that Robert Cook, Director of the Division of Trading and Markets, Meredith Cross,
Director of the Division of Corporate Finance, and Mark Cahn, General Counsel are leaving the
agency. Their departures follow the resignation of SEC Chairman Mary Schapiro. Commissioner
Elisse Walter will replace Chairman Schapiro.

 Federal Reserve to Review Foreign Bank Rules. On Friday, December 14, the Federal Reserve
will meet to consider rules on larger foreign banks with U.S. operations. In a recent speech, Federal
Reserve Governor Daniel Tarullo indicated that the proposed rule will subject foreign banks to similar
requirements as U.S. entities.

 FSOC to Meet in Closed Session. On December 13, the Financial Stability Oversight Council
(FSOC), chaired by Treasury Secretary Tim Geithner, will meet in a closed session. The FSOC last
met on December 3 in a closed session.

Health Care

 Doc Fix Negotiations. Congressional discussions to avert a scheduled cut to physician payments
under Medicare will continue next week, with some information on potential offsets emerging. Coding
adjustments, cuts to physician evaluation and management services in hospital outpatient
departments, graduate medical education, Medicaid provider assessments, exchange subsidies and
the enhanced Medicaid primary care payment are all on the table, but Congress has held the short
list of pay fors close to the vest. Rural hospitals are also urging members to include an extension of
certain programs that expired on September 30, 2012 that provided a funding adjustment for small
and low-volume providers. Meanwhile, fiscal cliff negotiations will continue to examine health
spending reduction targets, including suggested entitlement savings from $400 to $600 billion over 10
years.

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 House Oversight Hearing. The House Committee on Oversight and Government Reform will hold a
hearing on Wednesday, December 12, on “HGH Testing in the NFL: Is the Science Ready?”
Witnesses include Dick Butkus on behalf of I Play Clean; Larry Bowers, Chief Science Officer of the
U.S. Anti-Doping Agency; Dr. Lawrence Tabak, Deputy Director of the National Institutes of Health;
Mike Gimbel, Director of Powered by Me! at St. Joseph Medical Center; and Dr. Linn Goldberg with
the Oregon Health Sciences University.

 Ways and Means Hearing. The House Committee on Ways and Means Subcommittee on Human
Resources will hold a hearing on Wednesday, December 12, on a proposal to reduce child deaths
due to maltreatment. The hearing will focus on the Protect Our Kids Act, a bipartisan proposal that
would establish a commission to examine the issue of child fatalities from abuse and neglect, review
the effectiveness of current programs and policies, and recommend ways to reduce child fatalities
due to maltreatment.

 Finance Hearing. The Senate Committee on Finance has scheduled a hearing on Thursday,
December 13, on “Improving Care for Dually-Eligible Beneficiaries: A Progress Update.”

 Energy and Commerce Hearing. The House Committee on Energy and Commerce Subcommittee
on Health has scheduled a hearing for Thursday, December 13, on “State of Uncertainty:
Implementation of PPACA’s Exchanges and Medicaid Expansion.” Witnesses include Gary Cohen,
Director of the Center for Consumer Information and Insurance Oversight; Cindy Mann, CMS Deputy
Administrator and Director of the Center for Medicaid and CHIP Services; Bruce Greenstein,
Secretary of the Louisiana Department of Health and Hospitals; Dennis Smith, Secretary of the
Wisconsin Department for Health Services; Gary Alexander, Secretary of the Pennsylvania
Department of Public Welfare; Dr. Joshua Sharfstein, Secretary of the Maryland Department of
Health and Mental Hygiene; and Dr. Andrew Allison, Director of the Arkansas Department of Human
Services Division of Medical Services.

REGULATORY ACTIVITY

 Regulations Under Review. The Medicaid Eligibility Changes Under the Affordable Care Act Part II
Proposed Rule is currently under review at the Office of Management and Budget (OMB).

 Regulations Released. The Centers for Medicare and Medicaid Services (CMS) released the Patient
Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2014
Proposed Rule. This proposed rule provides further detail and parameters related to: the risk
adjustment, reinsurance and risk corridors programs; cost-sharing reductions; user fees for a
Federally-facilitated Exchange; advance payments of the premium tax credit; a Federally-facilitated
Small Business Health Option Program; and the medical loss ratio program. CMS also released the
Health Information Technology: Revisions to the 2014 Edition Electronic Health Record Certification
Criteria; and Medicare and Medicaid Programs; Revisions to the Electronic Health Record Incentive
Program Interim Final Rule with a Comment Period. This interim final rule with comment period also
revises the Medicare and Medicaid Electronic Health Record (EHR) Incentive Programs by adding an
alternative measure for the Stage 2 meaningful use (MU) objective for hospitals to provide structured
electronic laboratory results to ambulatory providers, correcting the regulation text for the measures

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associated with the objective for hospitals to provide patients the ability to view online, download and
transmit information about a hospital admission, and making the case number threshold exemption
for clinical quality measure (CQM) reporting applicable for eligible hospitals and critical access
hospitals (CAHs) beginning with FY 2013. This rule also provides notice of CMS’s intention to issue
technical corrections to the electronic specifications for CQMs released on October 25, 2012.

The U.S. Office of Personnel Management (OPM) released the Establishment of the Multi-State Plan
Program for the Affordable Insurance Exchanges Proposed Rule. Through contracts with OPM,
health insurance issuers will offer at least two multi-State plans (MSPs) on each of the Affordable
Insurance Exchanges (Exchanges). Under the law, an MSPP issuer may phase in the States in which
it offers coverage over four years, but it must offer MSPs on Exchanges in all States and the District
of Columbia by the fourth year in which the MSPP issuer participates in the MSPP. OPM aims to
administer the MSPP in a manner that is consistent with State insurance laws and that is informed by
input from a broad array of stakeholders.

IRS issued the Final Rule on the medical device tax. The regulations are applicable to sales of
taxable medical devices after December 31, 2012.

International, Defense, Homeland Security

 National Defense Authorization Act (NDAA) and Iran Sanctions. Expect certain provisions to
prove controversial during the upcoming House-Senate Conference Committee over the NDAA
following the Senate’s 98-0 passage of its version of the defense authorization bill, S. 3254, this past
Tuesday. Senator Dianne Feinstein’s (D-CA) amendment to bar the U.S. government from holding
U.S. citizens or legal aliens indefinitely has been criticized from the right and left. House Armed
Services Committee (HASC) Buck McKeon (R-CA) and HASC Vice Chairman Mac Thornberry (R-TX)
have expressed concern with the proposed policy limitation while certain human rights advocates fear
the provision would bolster the ability of the U.S. military to detain non-U.S. citizens/green card
holders without limitation. Meanwhile, Senator Jeanne Shaheen (D-NH) and other Democrats will
fight hard for the Senate bill’s language allowing abortion services at U.S. military facilities, but they
will encounter stiff resistance from Republican Conferees, if past years are any indication. On the
other hand, the new Iran sanctions language in the Senate NDAA bill, offered by Senator Robert
Menendez (D-NJ) and several other Senators, will not prove controversial, as House leaders have
signaled their comfort with the Senate provisions. In comparison, the White House has reiterated its
preference for continuing the Administration’s multilateral approach on Iran sanctions policy, although
it is difficult to envision a veto on those grounds. If enacted into law, the sanctions would bar all
transactions with specially designated nationals and the Iranian port, shipping, and energy industries,
among other provisions.

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 Senate Commerce Committee Developments. With the pending resignation of Senator Jim DeMint
(R-SC), most observers expect Senator John Thune (R-SD) to emerge as the next Ranking Member
of the Senate Commerce Committee. Senator Thune has taken an active interest in the Committee’s
homeland security portfolio, including transportation security and port security issues. Broadly
speaking, Senator Thune has emphasized the security benefits of employing advanced homeland
security technology, viewing privacy and efficacy concerns as inevitable but manageable offshoots of
technological innovation.

 Russia/Moldova PNTR. President Obama is expected to sign quickly the enabling legislation
providing “Most Favored Nation” Permanent Normal Trade Relations with Russia and Moldova. The
Senate passed the PNTR bill, which included Russia-focused human rights provisions, by a 92-4
count on Thursday. After Senator Ben Cardin (D-MD) withdrew his amendment to globalize the
Russia-centric human rights language, the Senate’s version remained identical to the House-passed
version, eliminating the need for a Conference Committee.

 House Foreign Affairs Committee Hearing on Eastern Congo. On Wednesday, December 12, the
House Foreign Affairs Committee’s (HFAC’s) Africa Subcommittee, chaired by Congressman Chris
Smith (R-NJ), will examine the deepening crisis in the eastern part of the Democratic Republic of the
Congo. Goma, the largest city in the resource-rich region, recently has shifted back to Congolese
government control, following its occupation by the M23 rebel group. M23 reportedly has received
support from neighboring Rwanda. In the hearing, Subcommittee Republicans may choose to accuse
already-embattled UN Ambassador Susan Rice and other Administration officials of being too lenient
on Rwanda, including President Paul Kagame, a longtime Rice confidant, during the crisis. If
Republicans pursue that approach, Assistant Secretary of State for African Affairs Johnnie Carson,
who is scheduled to testify, likely would respond that cultivating the support of Rwanda and other
neighboring states is vital to achieving a viable regional solution to the crisis.

REGULATORY ACTIVITY

 Secretary of Defense Decision. In addition to zeroing in on his choice for Secretary of State,
President Obama likely will announce his replacement for retiring Secretary of Defense Leon Panetta
in the next two weeks. Deputy Secretary Ash Carter and former Under Secretary Michele Flournoy
reportedly remain under consideration. Meanwhile, former Senator Chuck Hagel (R-NE), a Vietnam
veteran who currently heads the Atlantic Council and co-chairs the President’s Intelligence Advisory
Board, appears to have joined them on the short list. During President Bush’s second term, Senator
Hagel routinely criticized the Bush Administration’s approach on Iraq policy and other national
security matters while maintaining his conservative stances on fiscal and social issues. In other
words, President Obama’s selection of Senator Hagel to head the Pentagon (or the Central
Intelligence Agency) would signal, unsurprisingly, that although the campaign has ended, the White
House’s focus on courting the support of moderate, national security-oriented sectors of the
electorate continues unabated.

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Tax

 House Republicans Offer Counter to White House Fiscal Cliff Proposal. On December 3, in a
letter to the President, House Republicans submitted their counteroffer to the White House’s fiscal
cliff proposal. While the public rhetoric heated up last week between the Administration and House
Republicans, negotiations have yet to begin in earnest. Please see the Fiscal Cliff section above, for
more detailed coverage of this topic.

 Tax Hearings Next Week. The following tax-related hearing is scheduled next week in the Senate
Finance Committee:

December 12: Senate Finance Committee hearing on the Tax Reform and Federal Energy Policy:
Incentives to Promote Energy Efficiency

REGULATORY ACTIVITY

 IRS Releases Guidance on Medical Device Excise Tax. On December 5, the IRS released final
regulations (T.D. 9604) on the Affordable Care Act’s medical device excise tax. The final regulations
include additional guidance on the retail exemption and include 15 examples (including eight new
examples) showing how the retail exemption rules apply. Also released was a notice and frequently
asked questions that provide interim guidance on the implementation of the excise tax, including key
issues of concern to manufacturers and purchasers of medical device, such as rules on constructive
sales price, the treatment of licenses, the application of the tax to donated articles, and the
application of the tax to convenience kits and, further, provides relief from penalties for failures to
make adequate deposits of tax. The Notice invites comments on the interim guidance and states that
the deadline for submission of comments is March 29, 2013.

Transportation

 Infrastructure Funding and the Grand Bargain. This week, negotiations over the “fiscal cliff” will
continue. The Administration’s initial proposal included the $50 billion in upfront infrastructure
investment that President Obama has been pushing since 2010. Republicans have so far rejected the
idea of a deal that would include additional spending.

 Senate Committee Developments. On Thursday, December 6, Senator Jim DeMint (R-SC)
announced his resignation from the Senate in January to run the Heritage Foundation. Senator
DeMint was next in line to take over as ranking member of the Senate Commerce, Science and

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Transportation Committee. With Senator DeMint’s departure, Senator John Thune (R-SD) would
likely fill the position.

 House Committee Developments. Incoming Chairman of the House Transportation and
Infrastructure (T&I) Committee Bill Shuster (R-PA) may announce his proposed list of T&I
subcommittee chairmen as early as this week, although he is not required to do so until January.

REGULATORY ACTIVITY

 FTA Implementation of MAP-21. On Tuesday, December 4, the Federal Transit Administration
(FTA) posted a set of FAQs related to MAP-21 online. That information can be accessed here:
http://www.fta.dot.gov/legislation_law/about_FTA_14937.html.

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Capital Thinking ~ December 10, 2012

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