This article examines the methodology New York State used to set capitation rates for a Medicaid health maintenance organization. By examining the methods used and the assumptions made in a particular case, some general lessons are drawn about the ratesetting process. Greater reliance on statewide data to assure fair and statistically stable estimates is needed. Although the article focuses on one State and its ratesetting for one particular plan (Health Care Plus), the issues raised have general interest for other plans and for other States concerned with the setting of capitation rates for Medicaid enrollees in prepaid plans.