This article describes the Chronic Illness and Disability Payment System (CDPS), a diagnostic classification system that Medicaid programs can use to make health-based capitated payments for TANF and disabled Medicaid beneficiaries. The authors describe the diversity of diagnoses and different burdens of illness among disabled and AFDC Medicaid beneficiaries. Claims from seven States are analyzed, and payment weights are provided that States can use when adjusting HMO payments. The authors also compare the taxonomy and statistical performance of CDPS to other leading diagnostic classification systems and find that the new model performs better in a number of respects.