To amend title XVIII of the Social Security Act to provide for prospective payment under the Medicare program for inpatient services of rehabilitation hospitals and units based on discharges classified by functional-related groups.

SECTION 1. PROSPECTIVE PAYMENT FOR INPATIENT REHABILITATION HOSPITAL 
              SERVICES BASED ON DISCHARGES CLASSIFIED BY FUNCTIONAL-
              RELATED GROUPS.

    (a) In General.--Section 1886 of the Social Security Act (42 U.S.C. 
1395ww) is amended by adding at the end the following new subsection:
    ``(j) Prospective Payment for Inpatient Rehabilitation Services.--
            ``(1) In general.--Notwithstanding section 1814(b), but 
        subject to the provisions of section 1813, the amount of the 
        payment with respect to the operating and capital costs of 
        inpatient hospital services of a rehabilitation hospital or a 
        rehabilitation unit (in this subsection referred to as a 
        `rehabilitation facility') for a discharge is equal to the per 
        discharge payment rate established under this subsection.
            ``(2) Functional-related groups.--
                    ``(A) Establishment.--The Secretary shall 
                establish--
                            ``(i) classes of discharges of 
                        rehabilitation facilities by functional-related 
                        groups (each in this subsection referred to as 
                        a `functional-related group' or `FRG'), based 
                        on impairment, age, and functional capability 
                        of the discharged individual and such other 
                        factors as the Secretary deems appropriate, and
                            ``(ii) a method of classifying specific 
                        discharges from rehabilitation facilities 
                        within these groups.
                    ``(B) Weighting factors.--For each functional-
                related group the Secretary shall assign an appropriate 
                weighting which reflects the relative facility 
                resources used with respect to discharges classified 
                within that group compared to discharges classified 
                within other groups.
                    ``(C) Adjustments.--The Secretary shall from time 
                to time adjust the classifications and weighting 
                factors established under this paragraph as appropriate 
                to correct for forecast errors and to reflect changes 
                in treatment patterns, technology, and other factors 
                which may affect the relative use of resources.
            ``(3) Payment rate.--
                    ``(A) In general.--The Secretary shall determine a 
                prospective payment rate for each rehabilitation 
                facility discharge for which such rehabilitation 
                facility is entitled to receive payment under this 
                title. Subject to subparagraph (B), such rate for 
                discharges during a fiscal year shall be based on the 
                average payment per discharge under this title for 
                inpatient operating and capital costs of rehabilitation 
                facilities in fiscal year 1995 (as estimated by the 
                Secretary) adjusted--
                            ``(i) by updating such per-discharge amount 
                        to the fiscal year involved by the applicable 
                        percentage increases provided under subsection 
                        (b)(3)(B)(i) for each year after fiscal year 
                        1995 and up to the fiscal year involved;
                            ``(ii) by reducing such rates by a factor 
                        equal to the proportion of payments under this 
                        subsection (as estimated by the Secretary) 
                        based on FRG prospective payment amounts which 
                        are additional payments described in paragraph 
                        (4) (relating to outlier and related payments) 
                        or paragraph (7);
                            ``(iii) for variations among rehabilitation 
                        facilities by area under paragraph (6);
                            ``(iv) by the weighting factors established 
                        under paragraph (2)(B); and
                            ``(v) by such other factors as the 
                        Secretary determines are necessary to properly 
                        reflect variations in necessary costs of 
                        treatment among rehabilitation facilities.
                    ``(B) Budget neutral rates.--The Secretary shall 
                establish the prospective payment amounts under this 
                subsection for discharges during each of fiscal years 
                1998 through 2002 at levels such that, in the 
                Secretary's estimation, the amount of total payments 
                under this subsection for each such fiscal year 
                (including any payment adjustments pursuant to 
                paragraph (7)) shall not exceed the amount of payments 
                that would have been made under this title during the 
                fiscal year for operating and capital costs of 
                rehabilitation facilities had this subsection not been 
                enacted.
            ``(4) Outlier and special payments.--
                    ``(A) Outliers.--
                            ``(i) Day outliers.--The Secretary shall 
                        provide for an additional payment to a 
                        rehabilitation facility for discharges in a 
                        functional-related group, the lengths of stay 
                        of which exceeded the mean length of stay for 
                        discharges within that group by a fixed number 
                        of days or exceeds such mean length of stay by 
                        some fixed number of deviations, whichever is 
                        the fewer number of days.
                            ``(ii) Requesting additional payments.--For 
                        cases not included in clause (i), a 
                        rehabilitation facility may request additional 
                        payments in any case in which charges, adjusted 
                        to cost, exceed a fixed multiple of the 
                        applicable prospective payment rate, or exceed 
                        such other fixed dollar amount, whichever is 
                        greater, or exceed the prospective payment rate 
                        plus a fixed dollar amount determined by the 
                        Secretary.
                            ``(iii) Payment based on marginal cost of 
                        care.--The amount of such additional payment 
                        under clauses (i) and (ii) shall be determined 
                        by the Secretary and shall approximate the 
                        marginal cost of care beyond the cutoff point 
                        applicable under clause (i) or (ii).
                            ``(iv) Total payments.--The total amount of 
                        the additional payments made under this 
                        subparagraph for discharges in a fiscal year 
                        may not be less than 5 percent nor more than 6 
                        percent of the total payments projected or 
                        estimated to be made based on FRG prospective 
                        payment rates for discharges in that year.
                    ``(B) Adjustment.--The Secretary may provide for 
                such adjustments to the payment amounts under this 
                subsection as the Secretary deems appropriate to take 
                into account the unique circumstances of rehabilitation 
                facilities located in Alaska and Hawaii.
            ``(5) Publication.--The Secretary shall provide for 
        publication in the Federal Register, on or before September 1 
        before each fiscal year (beginning with fiscal year 1998), of 
        the classification and weighting factors for FRGs under 
        paragraph (2) for such fiscal year and a description of the 
        methodology and data used in computing the prospective payment 
        rates under this subsection for that fiscal year.
            ``(6) Area wage adjustment.--The Secretary shall adjust the 
        proportion (as estimated by the Secretary from time to time) of 
        rehabilitation facilities' costs which are attributable to 
        wages and wage-related costs, of the prospective payment rates 
        computed under paragraph (3) for area differences in wage 
        levels by a factor (established by the Secretary) reflecting 
        the relative hospital wage level in the geographic area of the 
        rehabilitation facility compared to the national average wage 
        level for such facilities. Not later than October 1, 1998 (and 
        at least every 12 months thereafter), the Secretary shall 
        update the factor under the preceding sentence on the basis of 
        a survey conducted by the Secretary (and updated as 
        appropriate) of the wages and wage-related costs incurred in 
        furnishing rehabilitation services. Any adjustments or updates 
        made under this paragraph for a fiscal year shall be made in a 
        manner that assures that the aggregated payments under this 
        subsection in the fiscal year are not greater or less than 
        those that would have been made in the year without such 
        adjustment.
            ``(7) Additional adjustments.--The Secretary shall provide 
        by regulation for--
                    ``(A) an additional payment to take into account 
                indirect costs of medical education and the special 
                circumstances of hospitals that serve a significantly 
                disproportionate number of low-income patients in a 
                manner similar to that provided under subparagraphs (B) 
                and (F), respectively, of subsection (d)(5); and
                    ``(B) such other exceptions and adjustments to 
                payment amounts under this subsection in a manner 
                similar to that provided under subsection (d)(5)(I) in 
                relation to payments under subsection (d).
            ``(8) Limitation on review.--There shall be no 
        administrative or judicial review under section 1878 or 
        otherwise of--
                    ``(A) the establishment of FRGs, of the methodology 
                for the classification of discharges within such 
                groups, and of the appropriate weighting factors 
                thereof under paragraph (2), and
                    (B) the establishment of the prospective payment 
                rates under paragraph (3).''.
    (b) Conforming Amendments.--Section 1886(b) of such Act (42 U.S.C. 
1395ww(b)) is amended--
            (1) in paragraph (1), by inserting ``and other than a 
        rehabilitation facility described in subsection (j)(1)'' after 
        ``subsection (d)(1)(B)'', and
            (2) in paragraph (3)(B)(i), by inserting ``and subsection 
        (j)'' after ``For purposes of subsection (d)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to cost reporting periods beginning on or after October 1, 1997.

Summary: Amends title XVIII (Medicare) of the Social Security Act to provide for prospective payment under Medicare for inpatient rehabilitation hospital services and units based on discharges classified by functional-related groups.