This study uses a linear programming technique called data envelopment analysis to identify changes in the efficiency frontier of inpatient rehabilitation hospitals after implementation of the prospective payment system. The study provides a time series analysis of the efficiency frontier for inpatient rehabilitation hospitals in 2003 immediately after implementation of PPS and then again in 2006. Results indicate that the efficiency frontier of inpatient rehabilitation hospitals increased from 84% in 2003 to 85% in 2006. Similarly, an analysis of slack or inefficiency shows improvements in output efficiency over the study period. This clearly documents that efficiency in the inpatient rehabilitation hospital industry after implementation of PPS is improving. Hospital executives, health care policymakers, taxpayers, and other stakeholders benefit from studies that improve health care efficiency.