About 500,000 children are coping with life-threatening conditions (LTC) in the United States every year. Different service programs such as an integrated pediatric palliative care program may benefit health-related quality of life (HRQOL) which is a great concern of this children population and their families. However, evidence is limited about the appropriate HRQOL instruments for use. This study aims to validate psychometric properties of a generic HRQOL instrument, the Pediatric Quality of Life (PedsQL) 4.0, for children with LTC. The parent proxy-report was used. We conducted a telephone interview to collect data of 257 parents whose children had LTC and were enrolled in Medicaid. We used standard psychometric methods to validate the PedsQL: scale reliability, item-domain convergent/discriminant validity, and known-groups validity. We also conducted Rasch analysis to assess construct validity. Results suggest that the PedsQL did not demonstrate valid psychometric properties for measuring HRQOL in this population. Rasch analysis suggests that the contents of the items in all domains did not appropriately cover the latent HRQOL of children with LTC. We document several methodological challenges in using a generic instrument to measuring HRQOL and propose a new framework to improve HRQOL measures for children with LTC. The strategies include revising the content of existing items, designing new items, adding important themes (e.g., financial challenge), and applying computerized adaptive test to better select appropriate items for individual children with LTC.