Objective. There has been lengthy debate as to which setting, skilled nursing facility (SNF) or inpatient rehabilitation facility (IRF), is more efficient in treating joint replacement patients. This study aims to determine the efficiency of rehabilitation care provided by SNF and IRF to joint replacement patients with respect to both payment and length of stay (LOS). Methods. This study used a prospective multisite observational cohort design. Tobit models were used to examine the association between setting of care and efficiency. The study enrolled 948 knee replacement patients and 618 hip replacement patients from 11 IRFs and 7 SNFs between February 2006 and February 2007. Output was measured by motor functional independence measure (FIM) score at discharge. Efficiency was measured in 3 ways: payment efficiency, LOS efficiency, and stochastic frontier analysis efficiency. Results. IRF patients incurred higher expenditures per case but also achieved larger motor FIM gains in shorter LOS than did SNF patients. Setting of care was not a strong predictor of overall efficiency of rehabilitation care. Great variation in characteristics existed within IRFs or SNFs and severity groups. Medium-volume facilities among both SNFs and IRFs were most efficient. Early rehabilitation was consistently predictive of efficient treatment. Conclusions. The advantage of either setting is not clear-cut. Definition of efficiency depends in part on preference between cost and time. SNFs are more payment efficient; IRFs are more LOS efficient. Variation within SNFs and IRFs blurred setting differences; a simple comparison between SNF and IRF may not be appropriate.