Capital Thinking ~ December 3, 2012

General Legislative
On Monday, December 3, the House will meet at noon for morning hour and at 2:00 for legislative
business. No votes are expected in the House. Legislation under consideration will include H.R.
5817 – Eliminate Privacy Notice Confusion Act. On Tuesday, December 4, and Wednesday,
December 5, the House will meet to consider the following legislation under suspension of the
rules: H.Res. - Providing for the concurrence by the House in the Senate amendments to H.R.
2838, with an amendment; H.R. 6582 - To allow for innovations and alternative technologies that
meet or exceed desired energy efficiency goals, and to make technical corrections to existing
Federal energy efficiency laws to allow American manufacturers to remain competitive, as
amended; H.R. 6602 - To make revisions in title 36, United States Code, as necessary to keep the
title current and make technical corrections and improvements; H.R. 6605 - To eliminate an
unnecessary reporting requirement for an unfunded DNA Identification grant program; H.R. 6620 -
To eliminate certain limitations on the length of Secret Service Protection for former Presidents
and for the children of former Presidents; H.R. 6223 - To amend section 1059(e) of the National
Defense Authorization Act for Fiscal Year 2006 to clarify that a period of employment abroad by
the Chief of Mission or United States Armed Forces as a translator, interpreter, or in an executive
level security position is to be counted as a period of residence and physical presence in the
United States for purposes of qualifying for naturalization if at least a portion of such period was
spent in Iraq or Afghanistan, and for other purposes, as amended; S. 3486 - Patent Law Treaties
Implementation Act of 2012; and S. 2367 - 21st Century Language Act of 2012. No votes are
expected on Thursday and Friday.

The Senate will convene on Monday, December 3, and resume consideration of S. 3254, the
National Defense Authorization Act for Fiscal Year 2013.

Fiscal Cliff
On November 28, President Obama met with Erskine Bowles and a group of prominent CEOs in a “fix-
the-debt” effort. At that meeting, President Obama hinted at a possible compromise on taxes. Earlier in
the day, a number of the same CEOs met separately with House Republican and Senate Democratic
Leadership.

The next day, Treasury Secretary Geithner met individually with the four Congressional Leaders,
unveiling the latest White House proposal for averting the fiscal cliff. Per Administration officials, the offer
proposes $1.6 trillion of net tax increases, which would occur in two steps: (1) the first trillion up front, with
(2) the remainder in a tax reform process to be completed by August 1, 2013. Although initial reports from
Congressional Republicans indicate that the Administration offered $400 billion in entitlement cuts to
occur next year, Administration officials have told the press that the proposal would accomplish $600
billion in entitlement cuts. It is unclear what accounts for this $200 billion discrepancy – there is some
conjecture that the Administration is proposing $400 billion in net entitlement savings. Entitlement reform

Patton Boggs Capital Thinking Weekly Update | December 3, 2012
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would also be set to occur by August 1, 2013. Further, the Administration proposes delaying the
sequester until August 1, 2013, using that date as a means to press Congress to action on tax and
entitlement reform. The details of the two-stage proposal follow:

STAGE ONE (to occur immediately):

Taxes
• Consistent with the President’s FY13 Budget proposal, the White House asks for an immediate
increase in top marginal rates for upper-income earners (those making above $200,000
individual/$250,000 married, filing jointly per year); reinstatement of personal exemption phase-out (PEP)
and the Pease limitation on itemized deductions; and capital gains and dividends tax increases (with the
top long-term capital gains rate to be set at 20 percent and the top dividend rate to rise to 39.6 percent)
• Reversion to 2009-level estate and gift tax structure ($3.5 million exemption, with a 45 percent rate for
larger estates)
• AMT patch and business tax extenders
• Payroll tax extension or new alternative policy
• Bonus depreciation extension

Spending/Extras
• Unspecified savings from certain non-entitlement mandatory programs
• Deferral of the sequester to August 1, 2013
• Extension of unemployment insurance
• Patch for SGR (“doc fix”)
• Multi-year stimulus package starting with at least $50 billion in FY 2013
• White House proposal for refinancing underwater mortgages
• Permanent increase in the debt limit, sufficient to avoid affirmative action to raise it again

STAGE TWO (to occur by August 1, 2013):

• Tax reform, including additional tax increases to equal $600 billion
• Medicare/entitlement policies from the President’s budget that could total $600 billion (likely $600
billion gross) in savings

On Friday, the Administration tweeted some specifics on the tax proposals underlying $1.6 trillion
proposed tax increase, including 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, repealing Last In First Out
(LIFO) accounting, repealing certain oil and gas preferences, reinstating Superfund taxes, changing the
treatment of financial and insurance products, and taxing carried interest as ordinary income.

Even with the clarifications offered by the Administration on Friday and over the weekend, Congressional
Republicans continue to reject the Administration’s proposal as a non-starter, arguing that: (1) the
proposed tax increases are way too high, front loaded, and raise marginal rates; (2) the extent of the

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proposed entitlement reform is insufficient and lacking in detail; (3) the proposed spending provisions are
intolerable; and (4) the proposal to raise the debt ceiling is a non-starter.

While the President did not meet face-to-face with House and Senate Leadership this week, he did speak
briefly with Speaker Boehner by phone on Wednesday. Staff from the Congressional Leadership offices
continue to communicate with White House staff, but as evidenced by the Administration’s offer, such
discussions have not resulted in any real progress and have slowed considerably compared to the days
following the initial Big Four meeting with the President on November 16th. The stalled pace of the
dialogue is due, in large measure, to a White House belief that it has the upper hand in the negotiations.
The White House views time as an ally for attempting to force Republicans to reconsider their position
that the top individual marginal tax rate should be maintained at 35 percent.

Despite a lack of progress, both Republicans and Democrats directly involved in the process believe both
sides want to reach a deal and avoid plunging off the fiscal cliff. However, outside the inner circle of
negotiators, predictions of failure persist, particularly on the Republican side, where many maintain that
President Obama wants to go over the cliff in the short-term. On the Democrats’ side, contrary to the
view espoused by Sen. Patty Murray (D-WA) and others, most senior Democrats do not support going off
the cliff, believing that any short-term tactical advantage gained is not worth the cost to the economy.
However, from a communications standpoint, the Geithner offer has not helped matters, with both House
Speaker Boehner and Senate Republican Leader McConnell criticizing the Administration for not
presenting a serious plan; Speaker Boehner on Friday declared that talks were at a stalemate. For its
part, the Administration is making clear that they do not intend to revise their proposal until Republicans
agree to raise marginal tax rates on at least some upper income taxpayers.

The goal of the negotiation 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, negotiators will 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 most likely shape of a deal would follow
the contours of what has been suggested publicly – a down payment on deficit reduction drawn from
both tax increases and mandatory spending reductions, along with greater measures to follow next year
through fundamental tax and fundamental entitlement reform. Aside from the magnitude of tax increases
and spending cuts, another thorny issue is the size and scope of the down payment.

Assuming such a deal materializes, expect to see an extension of the Bush tax cuts for most taxpayers,
with tax increases on certain upper-income taxpayers. It remains to be seen whether the Republicans’
position of limiting deductions or the President’s position of marginal rate increases (or a combination of
both) will prevail.

On the spending side, Republicans continue to maintain that there must be spending cuts included in any
year-end deal and, in his last meeting with principals, the President did signal a willingness to discuss

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such reforms. (Since that meeting, the President’s position has seemingly hardened, and he has refused
to offer details on what entitlement reform might look like until Republicans capitulate on marginal rate
increases for at least some upper-income taxpayers.) 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.

In-line with stages proffered by Administration’s current proposal, such a construct would 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 would be tasked with filling in a broad
structure, though some working parameters might be outlined in a year-end deal (and, 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.

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. As reported in the last edition of Capital Thinking, Senate Agriculture Committee
Chairwoman Debbie Stabenow (D-MI) continues to push for the Farm Bill to be included in the deficit-
reduction package to help Congress avert the fiscal cliff. However, as Congress now enters into the
month of December, the prospect of passing a five-year Farm Bill is becoming increasingly unlikely.
Late last week, House Agriculture Committee Chairman Frank Lucas (R-OK) shared a new proposal
that would include provisions in the deficit reduction package to extend the 2008 Farm Bill into 2013.
It would also require that the new five-year Farm Bill meet a floor for cost savings. Chairman Lucas
also shared that under this proposal, he would encourage Congress to pass a five-year Farm Bill by
next spring in order to include the bill in a budget reconciliation package, which traditionally only
requires an up-or-down vote and provides limited opportunities for amendments.

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Although including provisions in the deficit reduction package to extend the Farm Bill may gain
traction, we expect serious resistance from Senate and House Democrats on the budget
reconciliation component of Chairman Lucas’ plan. Democrats will not likely view budget
reconciliation as a viable Farm Bill vehicle because over the past three years, Congress has failed to
pass a budget reconciliation agreement. Given that the Senate remains in Democratic control in the
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113 Congress, we expect that Congress will not adopt a budget reconciliation agreement in 2013.

In the unlikely event that Congress fully adopts Chairman Lucas’ proposal, many agriculture
stakeholders may feel increased pressure to expedite their efforts in reforming or adding provisions in
the Senate-passed bill or House Agriculture Committee’s bill, given that opportunities to offer
amendments during floor votes will be largely foreclosed.

 Congressional Leadership. This week, the Republican Conference re-elected Rep. Frank Lucas (R-
OK) to serve a second term as Chairman of the House Agriculture Committee and Rep. Bob
Goodlatte (R-VA) to serve as Chairman on the House Judiciary Committee. As former Chairman of
the House Agriculture Committee farm groups will look to Representative Goodlatte to push
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immigration reforms that align with agribusinesses interests in the 113 Congress.

Budget, Appropriations

 Supplemental Appropriations for Disaster Relief. With current federal aid requests from New
York, New Jersey and Connecticut totaling over $80 billion, the White House is expected to submit a
disaster relief funding request to Congress as early as next week. Approval of such a large request
would be complicated by the ongoing fiscal cliff negotiations as well as a Republican push to offset
any amount of funding over the $11.8 billion FY 2013 Disaster Relief Fund cap established in the
Budget Control Act of 2011 (P.L. 112-25). The six-month FY 2013 Continuing Resolution (P.L. 112-
175), which runs through March 27, 2013, allocated $6.4 billion to the Disaster Relief Fund; hence,
Congress could expedite the remaining $5.4 billion through a supplemental or omnibus appropriations
bill.

 Omnibus Appropriations Bill. Appropriators continue to work on an FY 2013 omnibus
appropriations measure utilizing the $1.047 trillion discretionary spending cap established in the
Budget Control Act of 2011 (P.L. 112-25). Despite the impetus of using the omnibus as a vehicle for
disaster aid, there is currently no indication from Congressional leadership that they support moving a
comprehensive spending bill in the lame duck session.

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Cybersecurity

 Cybersecurity Legislation. With little hope of reaching a compromise on cybersecurity legislation in
the lame duck, the new leaders of the House Homeland Security Committee and Senate Homeland
Security and Governmental Affairs Committee (HSGAC), Rep. Michael McCaul (R-TX) and Senator
Tom Carper (D-DE) respectively, have both said that cybersecurity is one of their biggest priorities for
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the 113 Congress. A current co-chair of the Congressional Cybersecurity Caucus, Rep. McCaul
called cybersecurity the “single highest priority in the next Congress” and stated that he is planning to
reach out to the Senate HSGAC leadership to bring together the two chambers, given the lack of
cooperation that was seen in the last Congress. Senator Carper also said that he would like to see
cybersecurity legislation move in the first six months of next year.

EXECUTIVE BRANCH ACTIVITY

 Executive Order: In light of the fact that legislation will likely have to wait for next year, the
Administration continues to prepare an Executive Order (EO) that is expected to be released before
the end of December. The White House has been meeting with key stakeholders in the private sector
throughout the month in order to gather feedback, address any concerns, and gain industry support
for the EO.

 International Atomic Energy Agency Cyberattack. After breaking into one of the International
Atomic Energy Agency’s (IAEA) servers, a group of hackers leaked the email contact information of
many of the experts that work at the agency. The hacker group, Parastoo, planned the attack in order
to press the IAEA to investigate Israel’s nuclear activities at the Negev Nuclear Research Center.

Education

 Immigration and Highly Skilled Workers. While the House spent a great deal of time last week
reconsidering and eventually passing the revamped STEM Jobs Act (HR 6429) introduced by
Judiciary Committee Chairman Lamar Smith (R-TX), the measure is not likely to be taken up by the
Senate in the lame-duck. The bill is designed to increase visas for high-skilled immigrants with
advanced science, technology, engineering, and mathematics (STEM) degrees, but the White House
has threatened to veto the measure and instead wishes to consider proposals to attract and retain
highly skilled immigrants as part of a comprehensive immigration reform package. The Administration

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opposes the bill’s elimination of the Diversity Visa program and the limitations placed on the type of
STEM degrees eligible as well as the number of visas for family members through the “V”
nonimmigrant visa program.

Also last week, Senators Kay Bailey Hutchison (R-TX) and Jon Kyl (R-AZ) introduced a Republican
alternative to the Democrat-supported DREAM Act. Their bill, the ACHIEVE Act, would use a three-
step process to legalize qualified undocumented children, but would not provide a path to citizenship.
Though Senator John McCain (R-AZ) is a supporter and is pushing for a vote in the lame duck, the
bill is more likely to serve as a Republican starting point on immigration reform in the next Congress.
With both Senators Hutchison and Kyl retiring this year, Senators McCain and Marco Rubio (R-FL)
are expected to lead the issue for Republicans next year.

 National Defense Authorization Act (NDAA) Amendments. During the Senate’s consideration of
NDAA last week, Senators filed a number of amendments related to veterans’ education, including,
most notably, two amendments filed by retiring Senator Jim Webb (D-VA). The first amendment
(#2958) offered by Senator Webb adopts in its entirety the “Military and Veterans Educational Reform
Act of 2012.” Senator Webb introduced the bill earlier this year, which would require all education
programs receiving funding from the Tuition Assistance and Post-9/11 GI Bill be “Title IV” eligible and
create a complaint tracking system. The second amendment (#2957) would only implement the
proposed complaint tracking system. Despite the Senate’s recognition that both amendments are of
great priority to Senator Webb, particularly as he leaves the Senate, the prospects of the Senate
passing such amendments are increasingly slim. Both the American Council on Education and the
Veterans of Foreign Wars oppose the amendments. On Friday, the Senate filed for cloture, and we
expect a vote on NDAA by mid-week.

 Hearings and Events. On Wednesday, December 5, the Senate Health, Employment, Labor, and
Pensions (HELP) Committee will hold an executive session meeting to consider nominations, as well
as the Uninterrupted Scholars Act (S. 3472), which seeks to improve education outcomes for children
in the foster care system. On Thursday, December 6, the Center for American Progress will hold an
event titled, “Lessons from the NFL for Managing College Enrollment.” Deputy Undersecretary for
Education Georgia Yuan is a featured speaker.

Energy

 Congressional Hearings. On Wednesday, the House Financial Services Committee will hold a
hearing on “Assessing the Economic and Market Implications of the Dodd-Frank Derivatives Title.”

REGULATORY ACTIVITY

 Smart Grid. The Smart Grid Advisory Committee will next meet December 18-19 to discuss the
National Institute of Standards and Technology’s response to recommendations from the committee’s

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report, and to receive presentations on cybersecurity coordination and the NIST Smart Grid Program
Plan.

 Utility MATS and NSPS Rules. Following the February 16, 2012 publication of EPA’s final rules, the
agency is reconsidering certain new source standards for fossil fuel-fired utility steam generating
units. This includes the applicable requirements during periods of startup and shutdown for the
Mercury and Air Toxics Standards (Utility MATS), the startup and shutdown provisions related to the
particulate matter standard in the Utility New Source Performance Standards (NSPS), and certain
revisions to the definitional and monitoring provisions of the Utility NSPS. EPA is also proposing
certain technical corrections to both. EPA will hold a public hearing on December 18; comments on
only those specific aspects of the final Utility MATS and NSPS rules are due by December 31. The
agency is not reconsidering any other provisions of the standards.

 University ARPA-E. The Department of Energy will host an Advanced Research Projects-Energy
(ARPA-E) University on “Energy Innovation and IP Strategy” on December 12. It will focus on the
decision-making process about how best to protect an invention.

 LNG Export Study. Independent third party analysis of a long-awaited report reviewing the economic
impacts of proposed liquefied natural gas exports is still in progress. The complete report is expected
by year-end. DOE will then solicit public comments in connection with pending applications and then
continue the statutory process to make public interest determinations on those applications.

 State Decisions on Accounting and Auditing Relief for Federal Oil and Gas Marginal
Properties. Interior’s Office of Natural Resources Revenue has published its required year-end
notification regarding the list of states and their decision regarding marginal property relief. The two
options are (1) notification-based relief for annual reporting; and/or (2) other requested relief, as
industry proposed and ONRR and the affected state approved. State decisions are available here.

 Offshore Wind. The Bureau of Ocean Energy Management is expected to issue notices for the
proposed sale of commercial wind energy leases offshore Rhode Island, Massachusetts, and Virginia
on December 3.

 MODUs. New Coast Guard guidance regarding electrical equipment installed in hazardous areas on
foreign-flagged Mobile Offshore Drilling Units that have never operated, but will operate, on the
United States Outer Continental Shelf will become effective on December 3.

Environment

 Hurricane Sandy. On Tuesday, December 4, the House Committee on Transportation and
Infrastructure will hold a full committee hearing entitled, “A Review of the Preparedness, Response
To and Recovery from Hurricane Sandy.” The hearing will aim to examine superstorm Sandy,
focusing on the storm’s impact on the nation’s largest transportation systems.

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REGULATORY ACTIVITY

 Greenhouse Gas Reporting. The Environmental Protection Agency (EPA) is extending its public
comment period for its proposed rule entitled, “Greenhouse Gas Reporting Program: Proposed
Amendments and Confidentiality Determinations for Subpart I.” The new deadline for public comment
is January 16, 2013. The comment period is being extended in part due to the new information the
agency has made available regarding the calculation of the “Tier 2a” emission factors that appear in
Tables I-11 and I-12 of the proposed rule.

 EPA Appoints New Heads of Two Independent Science Advisory Committees. EPA
Administrator Lisa Jackson has appointed two engineers to serve for the next two years as chairs of
two independent advisory committees – the EPA Science Advisory Board (SAB) and the Clean Air
Scientific Advisory Committee (CASAC). The SAB provides advice to the EPA Administrator on
scientific and technical information being used as the basis for EPA decisions. The CASAC provides
advice to the Administrator on the technical bases for EPA’s standards for criteria air pollutants. Dr.
David Allen, an engineer specializing in air quality, will serve as the SAB Chair, and Dr. Christopher
Frey, an environmental engineer expert in quantitative methods for dealing with variability and
uncertainty, will serve as the CASAC Chair.

 Convention on International Trade in Endangered Species of Wild Fauna and Flora. The
Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES) is an
international treaty designed to control and regulate international trade in animal and plant species
that are not or may become threatened with extinction. (These species are listed in Appendices
available on the CITES Secretariat’s Website at http://www.cites.org/eng/app/index.php). Currently,
176 countries, including the United States, are parties to CITES. The Convention calls for regular
meetings to consider amendments to the lists of species and any country that is a party to CITES can
propose amendments. Currently, the United States is developing its negotiating positions on
proposed resolutions, decisions and amendments. The U.S. Department of Interior, Fish and Wildlife
Service will be holding a public meeting on December 13, 2012 to discuss items on the provisional
agenda. The United States, as a party to the Convention, will attend CITES Conference in Bangkok,
Thailand, March 3 to 15, 2013.

Financial Services

 House Subcommittee to Review Dodd-Frank Implementation. On Wednesday, December 5, the
House Financial Services Capital Markets Subcommittee will host a hearing titled “Assessing the
Economic and Market Implications of the Dodd-Frank Derivatives Title.” Witnesses will include
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.

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 Senators to Discuss Federal Housing Administration. On Thursday, December 6, the Senate
Banking Committee will hold a hearing titled “Oversight of the FHA: Examining HUD’s Response to
Fiscal Challenges.” Shaun Donovan the Secretary of the Department of Housing and Urban
Development will appear before the Committee.

 Legislation Introduced to Combine the SEC and CFTC. House Financial Services Committee
Ranking Member Barney Frank (D-MA) and Congressman Mike Capuano (D-MA), Ranking Member
of the Subcommittee on Oversight and Investigations, introduced legislation which would merge the SEC
and the CFTC into a single independent regulatory commission. The “Markets and Trading
Reorganization Act” proposes the establishment of the Securities and Derivatives Commission which
would carry out the functions currently performed by the two independent agencies.

REGULATORY ACTIVITY

 FDIC Leadership Formally Appointed. On November 30, the Federal Deposit Insurance
Corporation (FDIC) announced that Martin Gruenberg and Thomas Hoenig were officially designated
by the President as the Chairman and Vice Chairman of the FDIC. On November 15, 2012, the
Senate confirmed both for their respective positions. President Obama recently signed the orders
making the confirmations official. Both were confirmed by the Senate for six-year terms as Members
of the FDIC Board of Directors on March 29, 2012.

 FSOC to Meet in Closed Session. On Monday, December 3, the Financial Stability Oversight
Council (FSOC), chaired by Treasury Secretary Tim Geithner, will meet in a closed session. The
FSOC last met on November 13, at which time it approved issuing proposed recommendations for
money market mutual fund reform for public comment.

Health Care

 Fiscal Cliff Negotiations. After another week of negotiations between the White House, Senate and
House Leadership, Congress has made little progress in discussions to avoid the fiscal cliff. House
Republicans rejected the most recent plan from the Administration, which included $400 billion in cuts
to health care programs. Senator Bob Corker (R-TN) released a proposal that would produce $4.5
trillion in fiscal reforms, including $641 billion in reductions to Medicare spending through means
testing, incrementally raising the eligibility age, phasing out bad debt payments and accelerating
home health productivity adjustments, and $70 billion from Medicaid through increased state
flexibility. Talks regarding a physician fee fix and other end of the year health measures also
continue, though it remains uncertain whether the provisions will be wrapped up in a larger deficit
reduction package or move separately. Discussions will continue next week as both sides hope to
reach a deal before the end of the year.

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REGULATORY ACTIVITY

 Regulations Under Review. The physician “sunshine” final rule, implementing an ACA provision that
requires manufacturers to disclose financial relationships with doctors, is now under review at the
Office of Budget and Management (OMB). The Flexibility, Efficiency, and Modernization of Child
Support Enforcement Programs Proposed Rule and the Transparency Reports and Reporting of
Physician Ownership of Investment Interests (CMS-5060-F) Final Rule are now under review at OMB.
OMB has completed review of the Opioid Drugs in Maintenance or Detoxification Treatment of Opiate
Addiction Final Rule and the Multi-State Exchanges; Implementations for Affordable Care Act
Provisions Proposed Rule.

 CMS Bulletin on Inpatient Psychiatric Coverage. The Centers for Medicare & Medicaid Services
(CMS) released an informational bulletin that clarifies that states may structure coverage and
payment for the benefit category of inpatient psychiatric hospital or facility services for individuals
under age 21 (hereinafter referred to as inpatient psychiatric facility benefit) to ensure that children
receiving this benefit obtain all services necessary to meet their medical, psychological, social,
behavioral and developmental needs, as identified in a plan of care. This clarification is intended to
describe flexibility currently available to states to ensure the provision of medically necessary
Medicaid services to children in inpatient psychiatric facilities.

OTHER HEALTH NEWS

 GAO Medicaid Report. The Government Accountability Office (GAO) released a report on Medicaid
spending. The report found that in fiscal year 2009, $43 billion in Medicaid expenditures could not be
traced to beneficiaries — the result of competing sets of data kept by CMS. While some of the
differences between the data sets were likely the result of spending on items like DSH payments, the
remaining differences between the two data sets are potentially explained by inconsistencies in CMS
guidance and states’ reporting practices, neither of which can be quantified. The report states that the
usefulness of these data sets as oversight tools is limited because of delays in reporting and
unnecessary inconsistencies between the two data sets, both of which are inconsistent with federal
internal control standards. Also, the 3-year lag in states’ reporting of MSIS data prevents its use for
timely oversight of beneficiary-related utilization and other spending trends.

 MedPAC Meeting. The Medicare Payment Advisory Commission (MedPAC) has scheduled their
next public meeting for December 6 and 7, 2012. Agenda details will be provided when available.

 IOM Meetings. The Institute of Medicine (IOM) Committee on Valuing Community-Based Non-
Clinical Prevention Policies and Wellness Strategies will host a briefing on December 5, 2012 on the
recently released report, “An Integrated Framework for Assessing the Value of Community-Based
Prevention.”

The IOM’s Roundtable on Value & Science-Driven Health Care will hold a meeting on December 5
and 6, 2012 on “Core Metrics for Better Care, Lower Costs, and Better Health.” Workshop
discussions will focus on measures core for insights on health care, costs, and status; existing

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requirements and sources of data currently available; perspectives of decision-makers and program
managers using the data to guide program decisions; challenges and barriers confronted; successful
pilot models to address the challenges; and strategies moving forward. The workshop aims to identify
issues, options and approaches to promoting and aligning existing national, regional, and institutional
measurement systems to assess progress toward achieving better care for individuals, lower per
capita costs, and better health for populations as the natural outcomes of a continuously learning and
improving health system.

International, Defense, Homeland Security

 National Defense Authorization Act (NDAA) and Iran Sanctions Developments. On Friday, the
Senate continued to consider amendments to S. 3254, its version of the annual defense authorization
bill. (The House passed its version, H.R. 4310, in June.) One of the most significant NDAA
amendments, offered by Senator Robert Menendez (D-NJ), Senator Mark Kirk (R-IL), and Senator
Joe Lieberman (I-CT) and co-sponsored by seven additional Democratic Senators, expands the
sanctions options intended to combat the Iranian nuclear program. The Menendez-Kirk-Lieberman
amendment passed 94-0 on Friday morning and is expected to be well-received by the House, if and
when the NDAA clears the Senate. If enacted into law, the amendment would bar transactions,
including non-U.S. transactions, with specially designated nationals and the Iranian port, shipping,
and energy industries, sectors which the provision labels as vital to Iranian proliferation efforts. The
amendment also would impose personal sanctions on individuals who supply certain metals and
software programs described as key for the Iranian shipping and nuclear sectors. The language also
deems as sanctionable Iranian Central Bank payments received in precious metals. The provision
also would sanction as human rights abusers individuals who divert humanitarian items intended for
the Iranian people, as well as block the assets of the Islamic Republic of Iran Broadcasting (IRIB)
network and its president in response to the IRIB’s broadcasting of allegedly forced confessions and
show trials of anti-regime elements.

Meanwhile, Senate Majority Leader Harry Reid (D-NV), Senate Armed Services Committee (SASC)
Chairman Carl Levin (D-MI), and SASC Ranking Member John McCain (R-AZ) intend to bring the full
NDAA to a final vote as soon as possible. Further down the line, following the expected completion of
the NDAA, Congressional leaders on defense issues again will turn their full attention to further
defense spending cuts, or the lack thereof, in any fiscal cliff package that emerges in the coming
weeks. If Congress and the President manage to strike a deal to stave off the $55 billion in defense
cuts next year under sequestration, the question remains what more targeted defense reductions, if
any, will replace them. Senator Levin has stated his willingness for approximately $100 billion in
additional defense cuts over the next decade (on top of the $500 billion in reductions agreed to last
year). However, the Senate and House Republican Caucus, as well as a few defense hawks in the
Democratic Caucus such as Senator Lieberman, will find that figure extremely hard to swallow.

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 House Homeland Security Committee (HHSC) and House Foreign Affairs Committee (HFAC)
Developments. Following last week’s surprise choice of Congressman Mike McCaul (R-TX) to chair
the HHSC in the next Congress, look for the committee to emphasize cybersecurity issues in the
coming two years. Following multiple rounds of Steering Committee balloting on Tuesday,
Congressman McCaul narrowly defeated two fellow HHSC Subcommittee Chairs, Congresswoman
Candice Miller (R-MI) and Congressman Mike Rogers (R-AL), and the full House GOP Caucus
endorsed the selection of Representative McCaul the following day. During his HHSC tenure,
Representative McCaul has delved into cybersecurity issues and, to some degree, border security
concerns while devoting relatively less attention to transportation security matters. With his
background as a former federal prosecutor, Congressman McCaul also will be well-suited to continue
outgoing HHSC’s Chairman Peter King’s (R-NY) focus on domestic counterterrorism issues.

Meanwhile, look for incoming HFAC Chairman Ed Royce (R-CA), who defeated Congressman Chris
Smith (R-NJ) in a Steering Committee vote last week, to continue his longstanding focus on
nonproliferation issues (particularly involving North Korea) and counterterrorism matters. Also look for
the well-liked Royce to partner well with his likely Democratic counterpart, genial longtime HFAC
member Congressman Eliot Engel (D-NY). Representative Engel still faces Delegate Eni
Faleomavega (D-AS) for the Ranking Member spot, but Congressman Engel has consolidated
support from many HFAC Democrats, including Congressman Brad Sherman (D-CA), who recently
withdrew from consideration for the position.

REGULATORY ACTIVITY

 Secretary of State Decision. In the coming week, look for President Obama to attempt to settle on
his nominee to replace Hillary Clinton as Secretary of State. Continued Republican criticism of U.S.
UN Ambassador Susan Rice for her response to the Benghazi attack, including following
Ambassador Rice’s multiple appearances on Capitol Hill this past week, has put the President in a
challenging position, no matter what he ultimately decides. If he has wanted to nominate Ambassador
Rice all along and decides to do so, she will face as grueling a confirmation battle as any Cabinet
nominee in recent memory, possibly since John Ashcroft for Attorney General in 2001. Of course, if
President Obama instead backs away from Ambassador Rice as his preferred nominee, by definition
he will have to settle for a second choice for his most highly-visible Cabinet post. Finally, if the
President instead has preferred Senate Foreign Relations Committee (SFRC) Chairman John Kerry
(D-MA), former SFRC Member Chuck Hagel (R-NE), or another candidate for Secretary of State all
along, he will have a difficult time convincing Senate Republicans of that fact, given his vociferous
defense of Ambassador Rice in recent days. On the other hand, if President Obama does nominate
Ambassador Rice, Republicans would face a dilemma of their own, since deciding to filibuster an
African-American woman with robust foreign policy experience may not sit well with swing sectors of
the electorate. Moreover, Senate Democrats have signaled a willingness to fight for Ambassador Rice
if she is nominated, despite her longstanding reputation for sharp elbows even within the Democratic
foreign policy establishment.

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Tax

 White House Releases Certain Details of Fiscal Cliff Proposal. Last week and over the weekend,
the Administration released certain details of its fiscal cliff proposal. While Congressional Republicans
continue to reject the basic contours of the Administration’s proposal, negotiations between the
President and Congressional Republicans have not yet begun 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 Joint
Economic Committee:

December 6: Joint Economic Committee hearing on the Fiscal Cliff: How to Protect the Middle
Class, Sustain Long-Term Economic Growth, and Reduce the Federal Deficit

Transportation

 Infrastructure Funding and the Grand Bargain. Treasury Secretary Tim Geithner, the White
House’s lead negotiator on the Fiscal Cliff, unveiled the Administration’s proposal to lawmakers this
week. Among the tax and fiscal reforms, the President’s proposal included $50 billion in new stimulus
spending for infrastructure, reprising a proposal that the President has made dating back to Fall 2010.
The President’s infrastructure proposal reportedly included funding for a National Infrastructure Bank,
consistent with his earlier proposals for additional infrastructure stimulus. House Minority Leader
Nancy Pelosi (D-CA) immediately came out in support of the additional investments, although to this
point the proposal has not received broad traction in the Congress. The potential to include
infrastructure investment in a “grand bargain” will continue to be a focal point for stakeholders, many
of whom have been pressing for the fiscal cliff talks to address the need for move revenue into the
Highway Trust Fund (HTF) to sustain the federal program and avoid large-scale cuts.

 Senate Committee Developments. Senator David Vitter (R-LA) will be taking over as Ranking
th
Member of the Senate Environment and Public Works (EPW) Committee in the 113 Congress. The
focus in the Senate has been on Hurricane Sandy recovery and infrastructure needs, as well as
WRDA legislation. EPW Chairman Barbara Boxer (D-CA) and Senator Vitter have indicated their
intent to focus on WRDA first thing out of the gate in the next Congress and to move a bill out of
Committee within 30 days from the beginning of the session. Work will continue on WRDA legislation
behind the scenes, but otherwise there are no hearings or public events on the EPW Calendar.

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 House Committee Developments. As expected, Congressman Bill Shuster (R-PA) was selected
this week to serve as Chairman of the House Transportation and Infrastructure Committee. The
Chairman outlined a broad agenda that included taking up the Water Resources Development Act
(WRDA), expiring rail policy legislation, and again confronting the surface transportation
reauthorization, as MAP-21 is set to expire on September 30, 2014. Chairman Shuster acknowledged
that the “number one challenge” facing the surface transportation program was “how to pay for it” and
signaled his openness to exploring various revenue alternatives to make up from the large and
growing shortfall in the HTF. It is expected that the Subcommittee Chairs will be announced in the
coming week(s). In the remaining days of the lame duck session, the Committee will hold hearings on
preparedness for, and the response to, Hurricane Sandy (December 4) and then another in a series
of hearings on passenger rail issues, focusing on the “High Speed and Intercity Passenger Rail
Program: Mistakes Made and Lessons Learned” (December 6).

REGULATORY ACTIVITY

th
 FTA Implementation of MAP-21. On Tuesday, December 4 , the FTA will be holding a live webcast
entitled “Overview of the MAP-21 Apportionment Notice and Guidance: What Does it Mean.” The
webcast will run from 1:30pm to 3:30pm EST. FTA’s apportionment notice lays out the available
funding and program conditions and is the first following the enactment of MAP-21.

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Capital Thinking ~ December 3, 2012

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