A system for measuring relevant parameters of nursing-home residents' functioning has been developed and tested. These parameters include physical activities of daily living, pain and symptoms, cognitive and affective activities, social contact, and satisfaction. Data on patients in a nursing home can be used to predict their subsequent status with reasonable accuracy. The data are less powerful in predicting the fate of discharged patients. Because the outcomes used cover a range of functional domains, value preferences have been used to establish the relative importance of these different outcomes. These were gathered from several groups representing both providers and consumers of long-term care. Finally, a method is developed for reimbursement based on the extent to which predicted functional outcomes have been achieved. The system is designed to be flexible and thus to accommodate a variety of payment schemes.