HCCs explained

Hierarchical condition categories (HCCs) are used by Medicare for risk adjustment.

Hierarchical condition category (HCC) is hard to pronounce; understanding HCCs is even more challenging. Developed in 2000, HCCs are part of a risk-adjustment model allowing Medicare to project the expected future annual cost of care. They're used for calculating payments to Medicare Advantage plans, accountable care organizations (ACOs), and certain Affordable Care Act (ACA) plans. Generally, chronic conditions are responsible for more Medicare costs than acute ones, so many chronic conditions are included among the HCCs.

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Image by Getty Images

Risk adjustment allows Medicare to “level the playing field” so plans that cover patients with more severe, complex, and costly conditions receive a larger capitated payment than plans with less costly patients. A plan must cover all the costs for its patients' care during the year with the funds received. If costs exceed the payment, the plan loses money. If costs are less than the payment, the plan keeps the residual.

HCCs group together ICD-10 codes for related diagnoses with similar clinical complexity and expected annual costs of care. Each HCC is assigned a relative weight proportional to the relative costs associated with its constituent diagnoses. Higher-cost HCCs have higher relative weights. HCC relative weights are therefore similar to diagnosis-related group weights and to relative value units for CPT codes.

CMS has created two separate sets of HCCs. The CMS-HCC set is used for Medicare Advantage plans and quality measure adjustment. The Department of Health and Human Services (HHS) HCC set is for ACOs and ACA plans. A total of 189 HCCs have been developed, but not all of them are used by Medicare. The CMS-HCC set includes 89 HCCs with more than 9,500 codes; the HHS-HCCs total 117 HCCs and more than 7,700 codes.

While there are some differences between these HCC sets, they are not substantial and the principles are the same. HCCs do not directly impact traditional Medicare fee-for-service payments to physicians, but for physicians participating in ACOs or other ACA shared-risk plans, compensation could be affected.

The Table gives a few CMS-HCC examples with relative weights and the number of constituent diagnoses. Notice that some HCCs contain only one or a few diagnoses and others contain hundreds. The relative weight of diabetes with chronic complications (HCC 18) is more than twice that for uncomplicated diabetes (HCC 19). Malnutrition (HCC 21) and amputation status (HCC 189) are heavily weighted. HCC 157 (pressure ulcer, stage 4) is the HCC with the second highest weight (at 2.112), highlighting the extremely high annual costs of caring for patients with stage 4 pressure ulcers and the importance of documenting pressure ulcer stages.

To determine payment to an organization, Medicare calculates a Risk Adjustment Factor (or RAF, pronounced “raf” as in “raft” without the “t”) for each patient by combining relative weights for certain of the patient's demographic factors with the weights of all HCCs covering diagnoses submitted on Medicare claims for that patient from certain sites of service during the calendar year. The individual patient's RAF scores are then averaged and this average RAF is multiplied by the base payment rate established by Medicare for the organization.

An HCC will not be included if one of its constituent diagnoses is not included. Each HCC is included only once in the RAF calculation. Once a diagnosis from an HCC has been submitted, other diagnoses in the same HCC have no impact.

The demographic factors have variable relative weights and include: 1) age, 2) gender, 3) cause of Medicare eligibility (age, disability, or end-stage renal disease), 4) dual (Medicare and Medicaid) versus single (Medicare only) eligibility, and 5) residence at home versus an institution (e.g., skilled nursing facility).

Take the example of a 75-year-old man who is not eligible for Medicaid and lives at home. Suppose he has diabetes with neuropathy (code E11.21 and HCC 18), chronic obstructive pulmonary disease (code J44.9 and HCC 111), and a history of residual stroke-related hemiparesis (code I69.359 and HCC 103). His demographics would carry a weight of 0.437, while his clinical conditions add weights of 0.368, 0.346, and 0.581, respectively. That adds up to 1.732, which multiplied by a base rate of $10,000 equals a payment of $17,320.

RAF calculations are derived from claims submitted for physician offices and hospital inpatient and outpatient departments. Other sites, such as free-standing ambulatory surgery centers, skilled nursing facilities, and hospice and home health care, are not included.

Today, HCCs are also used for risk adjustment of many quality and pay-for-performance measures for clinicians and hospitals, including the Merit-based Incentive Payment System (MIPS), the Hospital Value-based Purchasing Program (VBP), the Hospital Readmissions Reduction Program (HRRP), and the Hospital-Acquired Condition Reduction Program (HACRP). Hence, it is important to capture all diagnoses comprising HCCs from the RAF sites of service (including hospitals) and ensure assignment of the correct RAF.