Hierarchical Condition Categories (HCC)

Understanding Capitated Payment, Risk Adjustment, and HCCs

A capitated payment system is a system in which a medical provider receives payment per patient (as opposed to receiving payment for services rendered). It pays a physician or group of physicians a set amount for each enrolled person assigned to them, per period of time, whether or not that person seeks care.

The amount of remuneration in a capitated payment system is based on the average expected health care utilization of that patient, with greater payment for patients with significant medical history. This expected health care utilization is expressed in a risk score, with a score of 1.0 reflecting expenditures of an average beneficiary, and higher scores reflecting a higher risk - and as such higher expected expenditures and remuneration.

The process of calculating risk score (and thereby plan payments) for an individual is called risk adjustment. Risk score is calculated using demographic factors (gender, age, disability status, etc.) as well as medical status and history (specifically chronic illnesses such as cancer, diabetes, heart failure, etc). A numeric value is assigned to these various factors using a risk model. Various risk models exist (e.g., Rx and ESRD) to address the needs of various payment systems.

Hierarchical Condition Categories (HCCs) are used to capture medical status and history in many risk models (including the current risk models used by CMS and ACA requirements). In HCC methodology, certain diagnoses (i.e., ICD-10-CM codes) are assigned an HCC according to the nature and severity of the diagnosis. These HCCs are also assigned a risk factor. A patient's risk is generated by adding together the risk factors for the various HCCs they qualify for, with hierarchies preventing multiple diagnoses in the same disease group from inappropriately increasing the risk score. Effectively, HCCs translate a patient's diagnoses into a risk score used for capitated plan payment.

Proper documentation is essential for accurate risk score calculation and capitated payment.

Sources:  wikipedia | cms.gov

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