Risk adjustment, a method for adjusting healthcare costs to reflect the health status of a given population, will take on new significance under healthcare reform. In order to harness the true potential of such a powerful tool, critical stakeholders like governmental agencies, health plans, provider organizations, and employer groups must understand how to properly select, implement, and evaluate risk-adjustment models. Using the appropriate risk-adjustment methodologies in the correct context will contribute to more accurate healthcare pricing, more efficient utilization, and improved quality of care.