Purpose: We examined the relationship between the quality indicator for decline in activities of daily living (ADL) and the use of the Minimum Data Set (MDS) for determining Medicaid skilled nursing facility reimbursement. Design and Methods: We conducted a cross-sectional analysis using the 2004 National MDS Facility Quality Indicator reports as the dependent variable in a multilevel regression model. Our primary explanatory variable was a state-level binary variable distinguishing whether or not the state used an MDS-based Medicaid-reimbursement system in 2004. We obtained control variables through the Online Survey, Certification, and Reporting System. Results: Skilled nursing facilities located in states that used the MDS for Medicaid reimbursement reported more ADL decline than did facilities in states that did not use the MDS for reimbursement. Implications: The finding suggests that the ADL-decline quality indicator captures more than just quality, including state-level policy differences. Therefore, the ADL-decline quality indicator should be investigated and refined prior to being relied on for pay-for-performance initiatives.