Macool,
I knew I read about this somewhere when I was researching some VR&E stuff myself, here is what I think you are looking for.
CAVMSG
§ 21.266 Payment of subsistence allowance under special conditions.
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(a) Hospitalized veteran or serviceperson. A veteran pursuing a VA rehabilitation program under Chapter 31 while hospitalized in a VA medical center or in any other hospital at VA expense may receive the subsistence allowance otherwise payable. The subsistence allowance will be paid at the rates specified in §21.260, except:
(1) The amount of subsistence allowance or the allowance provided under §21.264 that may be paid to a veteran pursuing a rehabilitation program for any month for which the veteran receives compensation at the rate prescribed in §3.401(h) of this title, as the result of hospital treatment (not including post-hospital convalescence) or observation at the expense of VA may not exceed, when added to any compensation to which such veteran is entitled for the month, an amount equal to the greater of:
(i) The sum of: (A) the amount of monthly subsistence of the allowance payable under §21.264, and (

the amount of monthly disability compensation that would be paid to the veteran if he or she was not receiving compensation at the temporary 100 percent rate as the result of such hospital treatment or observation, or
(ii) The amount of monthly disability compensation payable under §3.401(h) of this title.
(2) A veteran pursuing a rehabilitation program while in post hospital convalescence (§3.401(h)) will be paid the regular rate of subsistence allowance.
(3) A serviceperson pursuing a rehabilitation program under Chapter 31 will not receive a subsistence allowance if he or she is hospitalized in a medical facility under the jurisdiction of the Secretary pending final discharge from the armed forces.
(Authority: 38 U.S.C. 3108(h))