Health care information technology is changing rapidly and dramatically. A small but growing number of clinicians, especially those in staff and group model HMOs and hospital-affiliated practices, are automating their patient medical records in response to pressure to improve quality and reduce costs. Computerized patient record systems in HMOs track risks, diagnoses, patterns of care, and outcomes across large populations. These systems provide access to large amounts of clinical information; as a result, they are very useful for risk-adjusted or health-based payment. The next stage of evolution in health-based payment is to switch from fee-for-service (claims) to HMO technology in calculating risk coefficients. This will occur when HMOs accumulate data sets containing records on provider-defined disease episodes, with every service linked to its appropriate disease episode for millions of patients. Computerized patient record systems support clinically meaningful risk-assessment models and protect patients and medical groups from the effects of adverse selection. They also offer significant potential for improving quality of care.