SECTION 1. EXTENDED PHASE-IN OF THE INPATIENT REHABILITATION FACILITY 
              CLASSIFICATION CRITERIA.

    (a) In General.--Section 5005 of the Deficit Reduction Act of 2005 
is amended--
            (1) in subsection (a), by striking ``apply the applicable 
        percent specified in subsection (b)'' and inserting ``require a 
        compliance rate that is no greater than the 60 percent 
        compliance rate that became effective for cost reporting 
        periods beginning on or after July 1, 2006''; and
            (2) by amending subsection (b) to read as follows:
    ``(b) Continued Use of Comorbidities.--For cost reporting periods 
beginning on or after July 1, 2008, the Secretary shall include 
patients with comorbidities as described in section 412.23(b)(2)(i) of 
title 42, Code of Federal Regulations (as in effect as of January 1, 
2007), in the inpatient population that counts towards the percent 
specified in subsection (a).''.
    (b) Medical Necessity Criteria for Beneficiaries Served in 
Rehabilitation Hospitals and Units.--The Centers for Medicare & 
Medicaid Services and Medicare fiscal intermediaries, Medicare 
administrative contractors, recovery audit contractors, and other 
government agents shall use and apply the criteria established in HCFA 
Ruling 85-2, as issued on July 31, 1985 (50 Fed. Reg. 31040), as the 
sole standard for determining the medical necessity of services 
provided by inpatient rehabilitation hospitals and units to Medicare 
beneficiaries under title XVIII of the Social Security Act.

SEC. 2. RECOMMENDATIONS FOR CLASSIFYING INPATIENT REHABILITATION 
              HOSPITALS AND UNITS.

    (a) Report to Congress.--Not later than 12 months after the date of 
the enactment of this Act, the Secretary of Health and Human Services, 
in consultation with physicians, administrators of inpatient 
rehabilitation and acute care hospitals, Medicare beneficiaries, and 
trade organizations representing inpatient rehabilitation hospitals and 
units, shall submit to the Committee on Ways and Means of the House of 
Representatives and the Committee on Finance of the Senate a report 
that includes--
            (1) an examination of the impact of the 75 percent rule on 
        the Medicare program and the specific impact of the rule on 
        Medicare beneficiaries; and
            (2) alternatives to the 75 percent rule policy for 
        determining exclusion criteria for inpatient rehabilitation 
        hospital and unit designation under the Medicare program, 
        including determining clinical appropriateness of inpatient 
        rehabilitation hospital and unit admissions, and including 
        alternative criteria based solely on a measure of a patient's 
        functional status which is independent of diagnosis.
For the purposes of this section, the term ``75 percent rule'' means 
the requirement of section 412.23(b)(2) of title 42, Code of Federal 
Regulations, that 75 percent of the patients of a rehabilitation 
hospital or converted rehabilitation unit are in 1 or more of 13 listed 
treatment categories.
    (b) Considerations.--In developing the report described in 
subsection (a), the Secretary shall include the following:
            (1) The effect of the 75 percent rule on access to 
        inpatient hospital rehabilitation care by Medicare 
        beneficiaries and the effectiveness of care available to such 
        beneficiaries in other health care settings.
            (2) A comparative analysis of the overall Medicare system 
        costs, including Medicare expenditures to acute care hospitals, 
        home health agencies, skilled nursing facilities, and long-term 
        care hospitals, resulting from implementation of the 75 percent 
        rule.
            (3) A analysis that compares the quality, cost, and patient 
        outcomes of inpatient rehabilitation services among different 
        post-acute care settings, including whether the Medicare 
        program and Medicare beneficiaries may incur higher costs of 
        care for the entire episode of illness because of factors such 
        as--
                    (A) readmissions to acute care hospitals that could 
                have been avoided absent the 75 percent rule; or
                    (B) extended lengths of stay in post-acute settings 
                other than a rehabilitation hospital or unit because 
                beneficiaries were denied access to care in such a 
                hospital or unit due to the 75 percent rule.

SEC. 3. TECHNICAL CORRECTION FOR INPATIENT REHABILITATION HOSPITALS AND 
              UNITS NOMENCLATURE.

    (a) In General.--Section 1886(j) of the Social Security Act (42 
U.S.C. 1395ww(j)) is amended--
            (1) in paragraph (1)(A), by striking ``(in this subsection 
        referred to as a `rehabilitation facility'), other than a 
        facility'' and inserting ``other than a hospital or unit'';
            (2) by striking ``rehabilitation facility'' and 
        ``facility'' and inserting ``inpatient rehabilitation hospital 
        or a rehabilitation unit'' and ``hospital or unit'', 
        respectively, each place it appears;
            (3) by striking ``rehabilitation facilities'' and inserting 
        ``inpatient rehabilitation hospitals or rehabilitation units'' 
        each place it appears; and
            (4) in paragraph (6), by striking ``rehabilitation 
        facilities' costs'' and inserting ``costs of inpatient 
        rehabilitation hospitals or rehabilitation units''.
    (b) Use of the Term ``IRH/U''.--The Secretary of Health and Human 
Services shall, under regulation and Medicare program guidance, use the 
term ``inpatient rehabilitation hospital/unit'' or ``IRH/U'' to refer 
to entities receiving payment for inpatient rehabilitation services 
under section 1886(j) of the Social Security Act (42 U.S.C. 1395ww(j)).

SEC. 4. EFFECTIVE DATE.

    Sections 1 and 3 of this Act shall take effect on July 1, 2007, and 
section 2 shall take effect on the date of the enactment of this Act.
Output: Amends the Deficit Reduction Act of 2005 to revise the classification criterion used to determine whether a hospital or hospital unit is an inpatient rehabilitation facility under title XVIII (Medicare) of the Social Security Act. Eliminates the current schedule of applicable percentages. Directs the Secretary of Health and Human Services, instead, to require in the classification criterion a compliance rate no greater than the 60% compliance rate that became effective for cost reporting periods beginning on or after July 1, 2006.

Requires the Secretary, for cost reporting periods beginning on or after July 1, 2008, to include patients with comorbidity in the inpatient population that counts towards such 60% compliance rate.

Requires the Centers for Medicare & Medicaid Services and Medicare fiscal intermediaries, Medicare administrative contractors, recovery audit contractors, and other government agents to use and apply the criteria established in HCFA Ruling 85-2, as issued on July 31, 1985, as the sole standard for determining the medical necessity of servivces provided by inpatient rehabilitation hospitals and units to Medicare beneficiaries.

Directs the Secretary to report to specified congressional committees: (1) an examination of the impact of the 75% rule on the Medicare program, and specifically on Medicare beneficiaries; and (2) alternatives to the 75% rule policy for determining exclusion criteria for inpatient rehabilitation hospital and unit designation under the Medicare program.