This article describes the risk-adjusted payment methodology employed by the Maryland Medicaid program to pay managed care organizations. It also presents an empirical simulation analysis using claims data from 230,000 Maryland Medicaid recipients. This simulation suggests that the new payment model will help adjust for adverse or favorable selection. The article is intended for a wide audience, including state and national policy makers concerned with the design of managed care Medicaid programs and actuaries, analysts, and researchers involved in the design and implementation of risk-adjusted capitation payment systems.