Objective To examine the impact of Medicare's inpatient rehabilitation facility (IRF) prospective payment system (PPS) on inpatient rehabilitation outcomes for patients with traumatic spinal cord injury (SCI). Design Retrospective study. Setting Twelve SCI Model Systems. Participants A sample of Medicare (n=296) and non-Medicare (n=3110) patients was selected from the National SCI Statistical Center Database from 1996 to 2006. Interventions Not applicable. Main Outcome Measures Motor FIM score change and length of stay (LOS). Results LOS decreased by about 5.8 days a year (P<.001) for Medicare patients and about 1.3 days a year (P=.031) for non-Medicare patients after PPS implementation. However, for both groups, FIM score gains were not significantly different in the pre-PPS and PPS periods. Conclusions Although significant decreases in LOS were observed for Medicare patients after IRF PPS implementation, Medicare patients' improvements in motor function did not decrease. Non-Medicare patients with SCI also experienced shortened stays after Medicare IRF PPS implementation, but had equivalent FIM score gains compared with their counterparts who received inpatient rehabilitation care before PPS implementation. IRF PPS implementation was associated with shorter stays, but was not associated with lower functional improvement. © 2011 American Congress of Rehabilitation Medicine.