Targeted delivery of dexamethasone to inflamed tissues using nanoparticles is much-needed to improve its efficacy while reducing side effects. To drastically improve dexamethasone loading and prevent burst release once injected intravenously, a lipophilic prodrug dexamethasone palmitate (DXP) was encapsulated into poly(DL-lactide-co-glycolide)-polyethylene glycol (PLGA-PEG) nanoparticles (NPs). DXP-loaded PLGA-PEG NPs (DXP-NPs) of about 150 nm with a drug loading as high as 7.5% exhibited low hemolytic profile and cytotoxicity. DXP-NPs were able to inhibit the LPS-induced release of inflammatory cytokines in macrophages. After an intravenous injection to mice, dexamethasone (DXM) pharmacokinetic profile was also significantly improved. The concentration of DXM in the plasma of healthy mice remained high up to 18 h, much longer than the commercial soluble drug dexamethasone phosphate (DSP). Biodistribution studies showed lower DXM concentrations in the liver, kidneys, and lungs when DXP-NPs were administered as compared with the soluble drug. Histology analysis revealed an improvement in the knee structure and reduction of cell infiltration in animals treated with the encapsulated DXP compared with the soluble DSP or non-treated animals. In summary, the encapsulation of a lipidic prodrug of dexamethasone into PLGA-PEG NPs appears as a promising strategy to improve the pharmacological profile and reduce joint inflammation in a murine model of rheumatoid arthritis.