REPRINT  October 2017

Donna M. Smith
L. Gordon Moore

healthcare financial management association  hfma.org

the role of HCCs in a

value-based payment system
Appropriate HCCs in Brief
The Centers for Medicare & Medicaid Services
documentation and (CMS) originally developed HCCs in 2004 to
adjust capitated payments for its Medicare
coding of hierarchical Advantage (Part C) plans based on risk. However, AT A GLANCE
with the growth of population health payment
condition categories models in the past decade, HCCs have become
>> Hierarchical condition
categories (HCCs) are
(HCCs) can have a more popular. HCCs are the risk-adjustment
methodology for Medicare and are used by all
becoming a focus for
hospitals and hospital-
significant impact on commercial Medicare Advantage plans. They owned physician
determine the payment rates for all Medicare practices as value-
payment in a value- beneficiaries based on the illness burden of based payment models
grow in popularity.
based system. each patient. HCCs are therefore essential for
any health plan providing coverage or any >> Under-reporting
HCCs could create an
health system providing care for a Medicare
impression that a
Steadily declining profit margins constitute beneficiary.
hospital is not providing
one of the most difficult challenges facing senior high-quality care, as
healthcare finance executives today. This With an increasing movement to value-based patients seem on paper
challenge is especially perplexing when census payment, non-Medicare plans (both commercial to be healthier than
volumes are steady, patient satisfaction is high, and Medicaid) are using other kinds of risk- they actually are.
and clinical outcomes are favorable. Although adjustment methodologies to determine payment >> Over-reporting HCCs
such a decline can occur for various reasons, as well as to adjust quality indicators, so the work can attract increased
including missed charges or coding-related of recognizing, documenting, treating, and scrutiny by CMS and
denials, one reason often overlooked by finance coding the full illness burden is increasingly lead to potential
recoupment of
executives is inaccurate reporting of hierarchical important across all payment types. Some
overpayments.
condition categories (HCCs). In an era when commercial plans are using HCCs, as discussed
payment is increasingly focused on value, later in this article.
inattention to HCCs can have a significant impact.

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an accurate picture of the severity of conditions of

patients across its patient population.
Top 10 Most Under-
Documented HCCs
Medicare Advantage (MA) plans receive a per-
>> Amputations member-per-month (PMPM) payment from
>> Artificial openings CMS to cover the cost of their enrollees. In some
>> Asthma and pulmonary disease cases, this payment is passed on to the providers
>> Chronic skin ulcer if there is a shared-savings program between the
>> Congestive heart failure provider and the MA plan. As part of the Medicare
>> Drug dependence Access and CHIP Reauthorization Act of 2015,
>> Metastatic cancers CMS will begin to adjust fee-for-service pay-
>> Morbid obesity
ments using HCCs and other factors as a basis
>> Rheumatoid arthritis
for the adjustment. If an ACO or health plan is
>> Specific type of major depressive disorder
involved, then the payment is set up to cover the
Source: 3M aggregated claims data
cost of the enrollees, similar to a budget for care.
Depending on the arrangement, most partici-
pants share in savings generated within the health
CMS currently uses HCCs when calculating plan or ACO. To accurately control costs, both
Medicare spending per beneficiary as part of the types of programs need an accurate evaluation of
total performance score under its Hospital Value- the status of the health of their enrollees.
Based Purchasing program. HCCs will continue to
play a role in CMS alternative payment models As the healthcare industry continues to make the
(APMs), such as shared-savings contracts and monumental shift from volume- to value-based
accountable care organizations (ACOs). payment, HCCs will play an increasingly essential
role in a hospital’s financial viability.
Again, commercial health plans also have begun
to apply risk-adjustment approaches to patient HCC Calculations: What Finance
populations using HCCs and other methodologies Executives Need to Know
to more accurately predict and control the cost of It’s easy to get bogged down in the complexity
care. And hospitals can benefit from making such of HCC calculations and how they translate to
risk adjustments because doing so ensures that payment. The most important thing to under-
payments reflect clinical complexity. stand is that each HCC is weighted using a risk-
adjustment factor (RAF) that’s similar in theory to
At their most basic level, HCCs stratify patient a DRG relative weight. The total RAF is based on a
risk, allowing health plans to predict the costs on patient’s disease complexity and on demographic
which capitated payments are based. In capitated factors such as age, gender, and domicile (i.e.,
payment arrangements, insurers render one whether the patient lives in the community or in a
risk-adjusted sum to a health system for provid- skilled nursing facility). RAF scores also take into
ing all the care and services that a patient requires consideration the simultaneous presence of
for an entire year. When a hospital inadvertently several conditions (e.g., congestive heart failure
omits HCCs, it essentially deprives itself of [CHF] and chronic obstructive pulmonary disease
payment because it fails to provide insurers with [COPD]). The higher the patient’s RAF score, the

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higher the assumed risk, and ultimately, the 0.259 for the interaction between CHF and COPD
higher the payment. and 0.182 for the interaction between diabetes
and CHF), Doris’s 2015 risk adjustment factor
HCCs are assigned based on diagnoses reported (RAF) is 2.998. When multiplied by a baseline
and coded in inpatient hospitals (both primary PMPM payment of $800 (a common amount used
and secondary facilities), outpatient hospitals, by many plans), the individual monthly payment
and physician practices. HCC data are not drawn for this patient comes to $2,398.
from claims submitted by skilled nursing
facilities, hospices, home health agencies, labs, By contrast, in 2016, Doris saw her primary care
radiology centers, or durable medical equipment physician only once and did not see her cardiolo-
providers. gist. The primary care physician documented
three diagnoses:
HCCs ultimately provide a snapshot into patient >>Diabetes without complications (HCC 19,
severity, giving insurers valuable information relative factor of 0.118)
that they can use to assess outcomes, predict >>Obesity (unlike morbid obesity, not an HCC
costs, and gauge overall hospital performance. under the CMS model)
It behooves executives to examine hospital data >>COPD (HCC 111, relative factor of 0.346)
from the insurer’s point of view. For example,
when claims data reveal relatively low RAF scores,
it may be difficult to explain consistently high High-cost care and poor outcomes
costs associated with patient care. (See the
sidebar on page 2 for the top 10 most for patients who seem healthy will
under-reported HCC diagnoses.)
not reflect well on the hospital and its
To illustrate, consider the case of Doris, a
76-year-old patient who lives at home with her
ability to deliver high-quality care.
daughter and manages multiple chronic condi-
tions. In 2015, Doris saw her primary care When the total disease score is added together
physician twice and her cardiologist once. The with a demographic score of 0.437, Doris’s
physicians documented a total of six diagnoses: 2016 RAF is 0.901. When the total RAF is
>>Diabetes w/retinopathy (HCC 18, relative factor multiplied by a PMPM payment of $800, the
of 0.368) monthly individual patient payment for Doris
>>Morbid obesity (HCC 22, relative factor of comes to $720.80.
0.365)
>>Rheumatoid arthritis (HCC 40, relative factor of In short, the MA plan would be paid $1,678 less
0.374) per month for Doris in 2016 than in 2015,
>>CHF (HCC 85, relative factor of 0.368) amounting to a difference in annual payment of
>>Abdominal aortic aneurysm without rupture more than $20,000. For providers participating
(HCC 107, relative factor of 0.299) in the Medicare Shared Savings Program (MSSP),
>>COPD (HCC 111, relative factor of 0.346) this difference in annual payment would mean
less shared funds. Although the physician will be
When added together with a demographic score of paid the contracted rate, this rate will likely
0.437 and two HCC interaction scores (i.e., decrease over time when the MA plan begins to

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The Dangers of Over-Reporting

Over-reporting HCC diagnoses also presents
Top 10 Most Over-Documented HCCs
risk. Inflated RAF scores lead to higher capitated
>> Conditions that have been surgically corrected (e.g., abdominal aortic payments that aren’t justified. (See the sidebar
aneurism) at left for the top 10 most over-reported HCC
>> Diabetes with complications diagnoses.) CMS is well aware of this vulnerabili-
>> Malnutrition ty and has begun to perform risk-adjustment data
>> Nephritis validation (RADV) audits of its MA plans. The
>> Pathological fractures (e.g., old pathological fractures reported as goal is to recoup overpayments resulting from
current)
provider HCC over-coding. To date, the agency
>> Pneumococcal pneumonia (e.g., unspecified pneumonia reported as
has determined that it made $16.2 billion in
pneumococcal)
improper payments to its Part C supplemental
>> Polyneuropathy (e.g., reported as current when no treatment,
evaluation, or monitoring is documented) plans, representing a 9.99 percent improper
>> Primary site cancers (e.g., indicating historical conditions as current) payment rate.a
>> Strokes (e.g., indicating acute stroke instead of late effect of stroke)
>> Vascular disease (e.g., reported as current when no treatment, In addition to RADV audits, the federal govern-
evaluation or monitoring is documented) ment has joined a whistleblower lawsuit against
Source: 3M aggregated claims data United Healthcare Medicare & Retirement, the
nation’s largest provider of MA plans. The lawsuit
accuses the carrier of implementing an organiza-
tionwide upcoding scheme to increase its
assume it costs less to deliver patient care for this
operating income by $100 million. This case
individual.
comes in the wake of more than a half-dozen
whistleblower lawsuits filed against MA plans in
It is important to remember that, for insurers,
the past five years, each of which essentially
perception is reality. In bundled payment or
alleges that these plans encouraged providers to
shared-savings contracts, hospitals are rewarded
inflate patient risk scores so the plans would
for their ability to achieve positive patient
receive higher payment from CMS.
outcomes while reducing costs. High-cost care
and poor outcomes for patients who, on paper,
Hospitals also are vulnerable in this new world
seem healthy will not reflect well on the hospital
of HCC scrutiny. HCC over-coding creates an
and its ability to deliver high-quality care in a
inflated prediction of the costs required to care
value-based system.
for patients, thus skewing the data on which
capitated payments are based. As CMS continues
RAF scores also are important in negotiating
to scrutinize its MA plans through RADV audits,
value-based payment contracts. If scores are low,
these plans, in turn, have begun to scrutinize
insurers will assume that patients are healthier
providers. Many providers report that MA plans
and thus cost less to treat. But if RAF scores are
are particularly aggressive in denying payment.
artificially low due to HCC omissions, hospitals
It may only be a matter of time before MA plans
will pay the price through lower capitated
start to audit providers themselves—and to recoup
payments, shelling out more on the front end for
payments where necessary.
patient care and being unable to recoup it on the
back end.
a. PaymentAccuracy.gov, “High Priority Programs,” accessed
Sept. 13, 2017.

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Understanding the Role of Hospital- participate. Hospitals should request transparen-

Owned Physician Practices cy around the data, including population-specific
Focusing on HCC compliance ensures accurate RAF scores, that insurers and ACOs use to judge
payments based on clinical complexity and performance.
prevents denials and potential recoupments in
the future. However, HCC compliance also should Another way to identify HCC gaps is to follow
be a focus for physician practices and other patient claims throughout the continuum of care.
ambulatory settings. Approximately 80 percent A hospital can aggregate two years’ worth of
of patient encounters that take place within an claims data from all care settings—inpatient,
integrated delivery system occur in physician outpatient, and physician practice—to establish
offices and clinics, according to a 3M claims each patient’s HCC baseline and annual RAF
analysis. Thus, the opportunity to capture score. The next step is to monitor claims going
HCCs—and affect hospital payment—often falls forward to determine what HCC diagnoses might
directly on office-based physicians. be missing in a given year. These missing
diagnoses can be used to drive physician work-
Because physicians tend to focus only on the flow changes and process improvements. This
patient’s presenting diagnosis, they often omit type of large-scale analysis can be enlightening
other relevant conditions, including chronic because it includes various touch points for
conditions that directly affect RAF scores. Even clinical care and may identify other opportunities
when physicians document these conditions, they for HCC capture, such as a hospital’s outpatient or
may not code them, which means the conditions referring facilities.
aren’t included in risk-adjustment methodolo-
gies. Another challenge is that HCCs must be Strategies to Engage Physicians
documented—and coded—at least once per in HCC Capture
calendar year. When patients don’t schedule Once a baseline audit is completed, hospitals can
appointments within a year, these diagnoses begin to engage physicians in HCC capture and
aren’t documented, treated, or coded. measure progress along the way. Physican buy-in
is critical and dependent on a process that allows
To ensure they are paid correctly, hospitals must physicians to maintain workflow and ability to
capture patients’ disease burden accurately and deliver patient care. To this end, hospitals should
completely—even when those patients are never consider the following strategies.
treated in an inpatient setting. Engaging office-
based physicians is critical. Hospital-owned Address clinical care gaps. Physicians can capture
practices can start by auditing a random sample HCCs for patients effectively only if the physi-
that includes the practice’s highest RAF scores, its cians see the patients at least once every year. The
average RAF scores, and its lowest RAF scores. key is for the physician practices to identify
Such an analysis can help identify the barriers to patients without scheduled visits and encourage
capturing HCC diagnoses, including documenta- them to make appointments so the physicians can
tion problems, coding omissions, problems with evaluate and document all conditions, including
template diagnoses, gaps in clinical care, and the HCC diagnoses, for appropriate billing.
others. Hospitals also may be able to gather HCC
data about physicians directly from the MA plans Focus on physician documentation. Physicians
with which they contract or the ACO in which they should be kept apprised of electronic health

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record (EHR) best practices. For example, >>Document specificity for diabetes, angina,
physicians should be encouraged to review all pneumonia, renal failure, chronic kidney
options in a templated drop-down menu and disease, and pressure ulcers. Additional
cautioned against the temptation of choosing the specificity yields a higher-weighted RAF score.
first—and often unspecified—option. For example, diabetes maps to three HCCs: with
acute complications (HCC 17, relative factor of
Physicians also should be asked to review the 0.312), with chronic complications (HCC 18,
option list to ensure that it doesn’t include relative factor of 0.312), and without complica-
conditions that have resolved over time. In case tions (HCC 19, relative factor of 0.102).
physicians plan to use the copy-and-paste >>Clarify the historical status of all diagnoses
function, they should be reminded that, if they do (i.e., active versus a history of a condition).
so, they must validate the accuracy and relevance >>Report all diagnoses that affect the patient’s
of the information to the current patient encoun- evaluation, care, and treatment, including the
ter. Copying and pasting irrelevant or inaccurate presenting diagnosis, coexisting acute condi-
information can lead to HCC over-coding. tions, and any chronic conditions. Note that
electronic claim forms allow providers to
Hospitals can help physicians by providing capture as many as 12 diagnoses.
pertinent and reliable real-time documentation
alerts. An alert might notify a physician that he or Ensure coding accuracy. When physicians assign
she should assess and document the specific type their own codes in the EHR, there is room for
of diabetes, for example, thereby sparing the error. Hospitals can help physicians by hiring
physician from the guesswork of trying to certified professional coders who can review
understand what documentation affects HCC physician-assigned codes and serve as resources
reporting. to answer questions about coding rules and
guidelines.
Office-based care coordinators may be able
to assist with these types of documentation Another option is to consider computer-assisted
reminders. Practices that perform chronic care coding (CAC) technologies. An effective CAC
management (CCM) may have a process in place solution can analyze a provider’s visit notes and
to capture HCCs. If a practice doesn’t perform codes to determine whether coding and billing
CCM, it may be able to create an HCC-capture are complete and accurate.
workflow for the annual wellness visit.
Physician engagement can make or break a
Another option is to train nurses to perform hospital’s HCC-capture strategy. Hospitals
previsit documentation reviews. During these should collaborate with physician practices to
reviews, nurses can be on the lookout for HCC determine what works best and identify what
diagnoses and remind physicians to assess and physicians need to feel supported in this
document these conditions. process. The goal is to ensure that true clinical
complexity—and the value of care provided—are
The following are some useful tips for physicians: what ultimately drive payment for hospitals and
>>Assess each chronic condition at least once a physicians alike.
year.

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A Look Ahead
CMS has said that it aims to be tying 50 percent of About the authors
all fee-for-service payments to value-based Donna M. Smith, RHIA,
payment models such as ACOs, medical homes, is senior consultant and project manager
bundled payments, or population-based pay- at 3M Health Information Systems,
ments by 2018.b HCCs and other types of risk Atlanta ([email protected]).
adjustment likely will play a role in each of these
models going forward, reinforcing the need for
hospitals to focus on HCC documentation and L. Gordon Moore, MD,
coding.  is senior medical director of clinical
strategy and value-based care at 3M
Health Information Systems, Silver
b. “Better Care, Smarter Spending, Healthier People: Paying Spring, Md. ([email protected]).
Providers for Value, Not Volume,” Centers for Medicare &
Medicaid Services, Jan. 26, 2015.

Reprinted from the October 2017 issue of hfm magazine. Copyright 2017, Healthcare Financial Management Association,
Three Westbrook Corporate Center, Suite 600, Westchester, IL 60154-5732. For more information, call 800-252-HFMA or visit hfma.org.
hfma.org  October 2017  7