Risky Business: Understanding HCC Scores and their impact on your bottom line

Risk adjustment methodologies have beena part of the healthcare world for 25 years, but to many in the healthcare business , they are still a mystery. The industry is buzzing about a shift from “volume to value” and risk adjusted, value-based reimbursement methodologies are the vehicle in which many hope to get there. One of the most common risk adjustment methodologies are called Hierarchical Coding Categories or HCCs. HCCs are beginning to play a pivotal role in the healthcare reimbursement landscape, and it is critical for both providers and practices to understand how accurate diagnosis coding impacts both effective patient care as well as their bottom line.

Mandated by the Balanced Budget Act of 1997, Healthcare.gov defines risk adjustment as “A statistical process that takes into account the underlying health status and health spending of the enrollees in an insurance plan when looking at their health care outcomes or health care costs”.The goal of these models is to estimate how much should be spent on caring for a patient in a year and using those projections to benchmark actual performance. Payers then usethe data in alternative payment methodologies, such as shared savings, to incentivize providers to focus on their patient population’s overall health and not just a specific encounter.

The CMS-HCCmethodologywas designed to help estimate the healthcare costs of Medicare eligible patients with chronic conditions and has two distinct componentsthat make up its cost estimate.The first is a patient’s demographics. These are variables such as age, sex, entitlement reason, and Medicaid eligibility. The secondare a patient’s ICD-10 Dx codes, which are tied to condition categories that have a pre-determined coefficient that relates to expected cost. Combined, this information makes up a patient’s Risk Adjustment Factor, or RAF,which becomes the basis for the HCC model’s cost projections.

The actual calculation of HCCs is extremely nuanced and is typically done via a SAS program. There are several variations of the scoring models, and scores can change based on disease interactions. We can, however,use a simple case study with illustrative coefficients to take a high-level look at the model and better understand the financial impact that HCCs can have on an organization’s bottom line.

The HCC model assumes 1.00 as an average RAF across the Medicare population and the regression algorithm calculates the expected healthcare costs of a patient with an average RAF score to be $9,365.50⁽¹⁾ for a year. Now, let’s look at Jane Doe, a76-year-old, dually eligible female, who is diabetic and suffers with vascular disease.Jane’s demographic factors alone already make her RAF score .645 but if her provider fails to capture her other conditions with the appropriate HCC codes, that is where her score stays. 

If her provider were to capture both her conditions in their documentation, but not to the highest level of specificity, Jane’s RAF increases to 1.062. However, with optimal documentation that captures Jane’s conditions to the highest level of specificity, her RAF score jumps to 1.973.

Janes’ medical conditions have not changed, but the documentation has changed.  The table below indicates the increase in reimbursement based on the increase in Jane’s RAF score.The difference between the lowest level of annual reimbursement and the highest level of annual reimbursement is $12,437.39, and that is just for one patient. Extrapolated across an entire patient population, the opportunity is substantial.

Providers are not taught how to document to the highest level of specificity in medical school. Therefore, many have an opportunity to significantly increase the RAF scores of their patient population. However, providers must remember that HCC coding is about documentation accuracy and not revenue maximization. The financial penalties forartificially inflated RAF scores are severe. The OIG has levied fines upwards of  $200 million to health plans that did not have the proper documentation to support the diagnoses that were submitted. It is imperative that providers capture a patient’s conditions on an annual basis to ensure that all the codes they are billing are supported.

Risk adjustment methodologies like HCCs are quickly becoming more prevalent in the industry. Many payers are trying to push providers from traditional fee for service reimbursement, and almost all new alternative payment methodologies will include some sort of risk-adjustment component.The eminent nature of these changes makes it imperative that providers are engaged and understandhow these changes will affect their bottom line.  Aligning provider incentives with payment programs, investing in practice analytics to monitor these efforts, and utilizing certified risk coders to review your provider’s documentation are critical elements for success in any risk adjustment methodology. Making sure your organization is prepared today is the best way prevent it from falling behind when these methodologies become more mainstream.