Given the increasing importance of performance indicators in current UK health policy, this paper provides a systematic review of empirical and theoretical writings concerning their use to improve health care quality. The paper outlines potential problems and explores how best to derive, implement and use performance indicator data, presenting results thematically. The two principal uses of indicator systems are as summative mechanisms for external accountability and verification, and as formative mechanisms for internal quality improvement. In the UK, the use of performance indicators in assurance and performance management systems has heavily influenced debate over their value. Major problems reported include the potential to undermine the conditions required for quality improvement, perverse incentives and the difficulty of using data to promote change. Technical problems include indicator selection; the availability, validity and reliability of data; confounding; and problems with robustness, sensitivity and specificity. Factors that help in the derivation, implementation and use of indicator systems include clear objectives, involvement of stakeholders in development, and use of 'soft' data to aid interpretation.