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Medicare is moving toward value-based payment. The Merit-Based Incentive Payment System (MIPS) program judges outpatient clinicians’ performance on a measure of annual Medicare spending. However, this measure may disadvantage outpatient clinicians who care for vulnerable populations because the algorithm omits meaningful determinants of cost.To determine whether factors not included in Medicare risk adjustment, including patient neuropsychological and functional status, as well as local area health resources and economic conditions, are associated with Medicare total annual cost of care (TACC), and evaluate whether accounting for these factors is associated with improved TACC performance by outpatient safety-net clinicians.In this retrospective observational study, we used the Medicare Current Beneficiary Survey (MCBS) to examine patient-reported neuropsychological and functional status and the Area Health Resources File to obtain information on local area characteristics. Included were Medicare beneficiaries with annual physician or clinic visits to outpatient safety-net (federally qualified health centers and rural health clinics) and non–safety-net clinics, contributing 76 927 person-years of data to the MCBS from 2006 through 2013. We used patient-level multivariable regression models to estimate the association between each factor and annual Medicare spending, and compared outpatient safety-net performance under current risk adjustment and after adding additional adjustment for these factors.Medicare TACC, measured as the total annual reimbursed amount per patient for Medicare Part A and Part B services, in all categories.Our study included 111 414 unique identifiable physicians, and the final weighted sample included 213 904 324 patient-years (unweighted, 76 927 patient-years) from 30 058 unique patients, of whom 17 478 (58.1%) were women. The mean (SD) patient age was 71.84 (12.48) years. The mean TACC was $9117. Those with higher than mean TACC included beneficiaries with depression ($14 436), dementia ($18 311), and difficulty with 3 or more activities of daily living (ADLs, $19 113) or instrumental ADLs ($17 443). After adjusting for comorbidities, depression and dementia were still associated with $2740 (95% CI, $2200-$2739) and $2922 (95% CI, $2399-$3445) higher TACC, respectively. Difficulty with 3 or more ADLs ($3121 higher; 95% CI, $2633-$3609) or instrumental ADLs ($895 higher; 95% CI, $452-$1337) was also associated with higher TACC. Adding these neuropsychological and functional factors, as well as local residence area factors, to risk adjustment calculations reduced outpatient safety-net clinicians’ underperformance on Medicare TACC relative to non-safety–net clinicians by 52% (from 0.098 to 0.047 difference in the observed to expected ratio).Neuropsychological and functional impairment are common in Medicare beneficiaries and are associated with increased annual Medicare spending. Failure to account for these factors may inappropriately penalize outpatient clinicians who care for these vulnerable groups, such as safety-net clinicians, for factors that are arguably beyond their control.