Strategies for managing increasing health system demand have focused on the acute sector and chronic disease management in the community, with little attention on the role of rehabilitation. There were over 53 000 inpatient rehabilitation episodes in Australia in 2006. We argue that rehabilitation can improve patient flow and outcomes in acute care if engaged early. The effectiveness of rehabilitation can be enhanced by increasing the intensity of therapy and developing models of rehabilitation that provide alternatives to inpatient care. Factors that reduce the efficiency of rehabilitation services include the location of many services in small, stand-alone hospitals without acute support; the lack of options for managing younger people with acquired disability in the community; and deficiencies in government programs for the supply of aids, equipment and home modifications. Improving the organisation of rehabilitation services should improve access to acute and rehabilitation inpatient beds, improve patient outcomes and reduce costs.