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This study examines the use of the patient review instrument (PRI), a reimbursement reporting system used by the New York State Department of Health, to assess quality of care based on risk-adjusted outcomes.Data for all residents in approximately 550 nursing homes in upstate New York are used to develop five risk-adjusted outcome measures. The five measures are rates of decline in functional status activities of daily living (ADL), rates of increases in severity of decubitus ulcers, physical restraints rates, dehydration rates, and rates of major accidents. Logistic models are used to adjust for individual patients' risk factors. The face validity, content, construct, and criterion validity of these measures is examined.Measures based on ADL decline, deterioration in decubiti, and physical restraints rates met all validity criteria and were correlated significantly with deficiency citations. Measures based on accident rates and rates of dehydration did not perform as well. There was significant variation in these quality measures across regions and between for-profit and nonprofit nursing homes.Information about quality of care is important to the efficient operation of competitive markets. Such information, however, often is costly to obtain and not available to individual patients. This study demonstrates that valid risk-adjusted outcome measures of quality can be developed based on data collected for reimbursement purposes.