BACKGROUND: Assessing physicians' clinical performance using statistically sound, evidence-based measures is challenging. Little research has focused on methodological approaches to setting performance standards to which physicians are being held accountable. OBJECTIVE: Determine if a rigorous approach for setting an objective, credible standard of minimally-acceptable performance could be used for practicing physicians caring for diabetic patients. DESIGN: Retrospective cohort study. PARTICIPANTS: Nine hundred and fifty-seven physicians from the United States with time-limited certification in internal medicine or a subspecialty. MAIN MEASURES: The ABIM Diabetes Practice Improvement Module was used to collect data on ten clinical and two patient experience measures. A panel of eight internists/subspecialists representing essential perspectives of clinical practice applied an adaptation of the Angoff method to judge how physicians who provide minimallyacceptable care would perform on individual measures to establish performance thresholds. Panelists then rated each measure's relative importance and the Dunn-Rankin method was applied to establish scoring weights for the composite measure. Physician characteristics were used to support the standard-setting outcome. KEY RESULTS: Physicians abstracted 20,131 patient charts and 18,974 patient surveys were completed. The panel established reasonable performance thresholds and importance weights, yielding a standard of 48.51 (out of 100 possible points) on the composite measure with high classification accuracy (0.98). The 38 (4%) outlier physicians who did not meet the standard had lower ratings of overall clinical competence and professional behavior/attitude from former residency program directors (p=0.01 and p=0.006, respectively), lower Internal Medicine certification and maintenance of certification examination scores (p= 0.005 and p< 0.001, respectively), and primarily worked as solo practitioners (p=0.02). CONCLUSIONS: The standard-setting method yielded a credible, defensible performance standard for diabetes care based on informed judgment that resulted in a reasonable, reproducible outcome. Our method represents one approach to identifying outlier physicians for intervention to protect patients.