We studied 186,766 Medicare discharges to the community in 1999 from 694 inpatient rehabilitation facilities (IRF). Statistical models were used to examine the relationship of functional items and scales to accounting cost within impairment categories. For most items, more independence leads to lower costs. However, two items are not associated with cost in the expected way. The probable causes of these anomalies are discussed along with implications for payment policy. We present the rules used to construct administratively simple, homogeneous, resource use groups that provide reasonable incentives for access and quality care and that determine payments under the new IRF prospective payment system (PPS).