What is HCC Coding: Risk Adjustment Models in Value-Based Care

As healthcare continues shifting from fee-for-service (FFS) to value-based care (VBC), accurate documentation and coding have become more critical than ever. Hierarchical Condition Category (HCC) coding is at the heart of this transition.

 

In this article, we’ll explore the fundamentals of HCC coding, how it impacts reimbursement, and why providers—even those outside of VBC—should take notice.

 

What is HCC coding? 

HCC stands for hierarchical condition category. It is a risk-adjustment coding model exclusively designed to estimate future healthcare costs for patients. The process of HCCs medical coding started in 2004, but it recently gained popularity due to payment models shifting from fee-for-service (FFS) to value-based care (VBC) arrangements.

 

Fig 1. Out of 70,000+ ICD10 codes, 7903 ICD-10s map to a hierarchical condition category. Each HCC ICD10 is subsequently bucketed into 115 individual “condition categories.

 

Fig 2. Each of the 7903 HCC codes is put into one of 115 condition categories. Each condition category carries a specific RAF. No matter how many ICD10 conditions a patient has in the same category, they will only be assigned the RAF score one time

 

Medicare assigns a risk score known as a risk adjustment factor (RAF) to each of the 86 individual condition categories. RAF scores of patient populations are subsequently used by Medicare and other payors to predict the cost of care, which influences reimbursements.

For the remainder of this article, we will explore the rationale behind HCC coding and why all providers (even those NOT in a value-based care arrangement) should care.

Why should doctors care about HCC coding?

HCC coding is the cornerstone of most value-based care arrangements. Today, “value-based care” is used synonymously with Medicare Advantage, but in the near future, we believe all forms of reimbursement will be tied to some VBC arrangement.

 

HCC coding falls under the broader term of risk adjustment (RA) models, where patient care is paid based on a prospective payment model. Specially designed RA models are used to determine risk scores for patients. In the Medicare Advantage world, these models use the demographics and HCC diagnoses of the patient to assign a risk score known as an RAF. The assumption is that the sicker the patient, the higher the RAF, and the more dollars it will take to care for this patient during any given year. Therefore, the RAF score of any patient population will determine the prospective payment Medicare disburses.

This prospective payment model based on RAF does 2 things:

 

1. Aligns physician incentives. Currently, clinicians make money from taking care of sick patients. The sicker the patient, the more visits, tests, or surgeries they have to do, and the more they are reimbursed. In this model, clinicians are incentivized to keep patients healthy and, therefore, require fewer tests and surgeries.

 

2. Spurs clinical innovation the right way. Right now, pharmaceuticals and medical hardware companies are all trying to find ways to treat diseases. The newer the drug or medical device, the more revenue they make. In this model, healthcare groups are incentivized to find new ways of preventing the disease progression from ever needing the latest drug or newest medical surgery equipment.

 

As Medicare and payers alike are starting to take notice of #1 and #2 above, the market is now trending towards building in value-based care drivers to all types of patients outside of Medicare Advantage. It’s unlikely a brand new risk model will be born for commercial patients. Therefore, all physicians will need to understand the risk adjustment models and the implications of documentation accuracy for reimbursement.

Conclusion

 

HCC coding is here to stay and will only grow in the years to come. While the market has heavily leveraged medical coders or third party vendors to do much of the lift thus far, V2 of Value-based Care will require all clinicians to understand and participate in it for every patient visit.

 

HCC coding’s importance is less about the impact on revenue and more about the shift toward VBC models, which have consistently shown better clinical outcomes at lower costs. 

 

Do you want to dive deeper into the financial implications of HCC coding and HCC coding tools? Read more in our VBC hub! 

 

Sources
https://www.asahq.org/quality-and-practice-management/managing-your-practice/timely-topics-in-payment-and-practice-management/an-introduction-to-hierarchical-condition-categories-hcc
https://www.aafp.org/fpm/2016/0900/p24.html

 

What is HCC coding in healthcare?

HCC (Hierarchical Condition Category) coding is a risk adjustment model used in healthcare to predict future medical costs for patients. It categorizes diagnoses based on severity and complexity, allowing payers to adjust reimbursements accordingly. HCC coding ensures that providers are properly compensated for treating high-risk patients.

How does HCC coding impact Medicare reimbursements?

Medicare uses HCC coding to determine reimbursement rates by assigning each patient a Risk Adjustment Factor (RAF) score based on their diagnoses. The higher the RAF score (indicating a sicker patient), the more Medicare will pay providers in a value-based care (VBC) model. Accurate HCC coding is crucial for ensuring fair and sufficient funding for patient care.

What is a risk adjustment factor (RAF) score in HCC coding?

A Risk Adjustment Factor (RAF) score is a numerical value assigned to patients based on their diagnoses, age, and demographics. Medicare and other payers use this score to estimate the cost of care for each patient. The higher the RAF score, the more financial resources are allocated for that patient’s healthcare needs.

How are ICD-10 codes mapped to HCC categories?

ICD-10 codes are mapped to HCC categories based on the severity and complexity of the diagnosed condition. Out of over 70,000 ICD-10 codes, approximately 9,500 are associated with one of the 86 HCC categories. Each ICD-10 code corresponds to a specific condition category in the HCC model, which reflects the patient’s risk of future healthcare costs.

Why should doctors outside of value-based care pay attention to HCC coding?

HCC coding isn’t just about reimbursement—it directly affects patient care. Accurate risk adjustment ensures that providers have a complete picture of a patient’s health, leading to better care coordination, appropriate treatment plans, and improved outcomes. As more healthcare models adopt risk-based payment structures, properly documenting chronic conditions will help ensure that patients receive the right care and support, regardless of the payment model.