Hierarchical condition category (HCC) coding is a risk-adjustment model originally designed to estimate future health care costs for patients. The Centers for Medicare & Medicaid Services (CMS) HCC model was initiated in 2004 and is becoming increasingly prevalent as the environment shifts to value-based payment models.
HCC coding relies on ICD-10-CM coding to assign risk scores to patients. Each HCC is mapped to an ICD-10-CM code. Along with demographic factors such as age and gender, insurance companies use HCC coding to assign patients a risk adjustment factor (RAF) score. Using algorithms, insurance companies can use a patient’s RAF score to predict costs. For example, a patient with few serious health conditions could be expected to have average medical costs for a given time. However, a patient with multiple chronic conditions would be expected to have higher health care utilization and costs.
Hierarchical condition category coding helps communicate patient complexity and paint a picture of the whole patient. In addition to helping predict health care resource utilization, RAF scores are used to risk adjust quality and cost metrics. By accounting for differences in patient complexity, quality and cost performance can be more appropriately measured.
Risk adjustment can play an important role in payment, and this is particularly true in value-based payment (VBP). VBP arrangements use a practice’s performance on cost and quality metrics to determine revenue, which means risk adjustment can have a direct impact on a practice’s revenue. When risk scores do not accurately reflect patient complexity, it may appear patients had higher costs and/or lower quality outcomes than would be expected. In certain payment models, this may cause a practice to fall below quality and cost performance targets and potentially miss out on the opportunity for shared savings.
In other models, such as capitation, a practice’s payment rate may be based on a patient or practice’s average risk score. For example, in Primary Care First, the population-based payment (PBP) is calculated using the average RAF of the practice’s attributed beneficiaries. Practices with more complex patients, based on RAF scores, receive a higher PBP as it is expected their patients will require more resources and have higher utilization.
Watch this Practice Hack video to learn how to use team-based strategies to improve risk adjustment for success in value-based payment.
| ICD-10 | DESCRIPTION | RAF |
| Demographics (age and gender) | 0.323 | |
| E11.9 | Type 2 diabetes mellitus without complications | 0.105 |
| I10 | Essential (primary) hypertension | 0.000 |
| Z68.38 | Body mass index (BMI) 38.0-38.9, adult | 0.000 |
| Total Risk= 0.428 |
| ICD-10 | DESCRIPTION | RAF |
| Demographics (age and gender) | 0.323 | |
| E11.42 | Type 2 diabetes mellitus with diabetic polyneuropathy | 0.302 |
| I10 | Essential (primary) hypertension | |
| E66.01 & Z68.38 | Morbid (severe) obesity due to excess calories and body mass index (BMI) 38.0-38.9 | 0.250 |
| I50.9 | Heart failure, unspecified (includes congestive heart failure not otherwise specified) | 0.331 |
| Disease interaction (DM + CHF) | 0.121 | |
| Total Optimized Risk 1.327 |
*These are sample patients only, using 2020 CMS HCC model values and 2021 ICD-10-CM codes.
A common critique of the HCC model is that it does not account for other factors that impact a patient’s health and well-being, such as health-related social needs. Developing a risk adjustment model that adjusts for social risk has been challenging for several reasons, including difficulty capturing data. Some models have begun incorporating area deprivation index or social deprivation index data. While these indices include data at the local level, they do not include data at the individual-patient level.
One option to collect individual-level data is with Z codes. Z codes are ICD-10-CM diagnosis codes that capture factors influencing a patient’s health. A subset of Z codes (Z55-Z65) is designed to capture potential health hazards related to socioeconomic and psychosocial circumstances. Whether and how Z codes will interact with risk adjustment models is yet to be determined. Z codes do not currently have HCC values associated with them. However, some payers have begun requiring practices to report Z codes.
Social determinants of health Z codes are included in the following Z code categories:
Z codes Z55-Z65 cannot be reported as the primary diagnosis.
Z codes can be based on self-reported data and/or information. The information must be signed off on and incorporated into the medical record by the physician or clinician.
