This study evaluates the efficiency of federal hospitals, specifically those hospitals administered by the US Department of Veterans Affairs and the US Department of Defense. Hospital executives, health care policymakers, taxpayers, and federal hospital beneficiaries benefit from studies that improve hospital efficiency. This study uses data envelopment analysis to evaluate a panel of 165 federal hospitals in 2007 and 157 of the same hospitals again in 2011. Results indicate that overall efficiency in federal hospitals improved from 81% in 2007 to 86% in 2011. The number of federal hospitals operating on the efficiency frontier decreased slightly from 25 in 2007 to 21 in 2011. The higher efficiency score clearly documents that federal hospitals are becoming more efficient in the management of resources. From a policy perspective, this study highlights the economic importance of encouraging increased efficiency throughout the health care industry. This research examines benchmarking strategies to improve the efficiency of hospital services to federal beneficiaries. Through the use of strategies such as integrated information systems, consolidation of services, transaction-cost economics, and focusing on preventative health care, these organizations have been able to provide quality service while maintaining fiscal responsibility. In addition, the research documented the characteristics of those federal hospitals that were found to be on the Efficiency Frontier. These hospitals serve as benchmarks for less efficient federal hospitals as they develop strategies for improvement.