Item banks and Computerized Adaptive Testing (CAT) have the potential to greatly improve the assessment of health outcomes. This review describes the unique features of item banks and CAT and discusses how to develop item banks. In CAT, a computer selects the items from an item bank that are most relevant for and informative about the particular respondent; thus optimizing test relevance and precision. Item response theory (IRT) provides the foundation for selecting the items that are most informative for the particular respondent and for scoring responses on a common metric. The development of an item bank is a multi-stage process that requires a clear definition of the construct to be measured, good items, a careful psychometric analysis of the items, and a clear specification of the final CAT. The psychometric analysis needs to evaluate the assumptions of the IRT model such as unidimensionality and local independence; that the items function the same way in different subgroups of the population; and that there is an adequate fit between the data and the chosen item response models. Also, interpretation guidelines need to be established to help the clinical application of the assessment. Although medical research can draw upon expertise from educational testing in the development of item banks and CAT, the medical field also encounters unique opportunities and challenges.