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Protecting Revenue with Accurate and Complete Hierarchical Condition Coding

Gerry Baker, MBA
McGraw Baker Consulting, LLC, Ponte Vedra, FL

Hospitals and health systems that own large multispecialty physician practices and that have assumed responsibility for managing a population under an accountable care organization (ACO) model should take steps now to minimize risk and protect their revenue by focusing more attention on hierarchical condition coding (HCC). This statement is especially true with the looming implementation of ICD-10 and its predicted impact on the level of reimbursement that many organizations are accustomed to currently.

What is HCC?

The HCC method was developed and implemented by Centers for Medicare & Medicaid Services (CMS) in 2004 to allocate Medicare Advantage (MA) revenue to those managed care plans who assumed the risk to insure Medicare patients. There are 70 coding groups, with 3,300 ICD-9 diagnosis codes mapping. The method relies on each group being assigned an additive weight and a dollar amount to determine how much each MA plan receives for care of that patient’s documented conditions (the risk adjustment). The success of this methodology is based upon annual assessment of the patients’ condition and the actual billing of every diagnosis to the plan for the patient during a calendar year. In other words, each year, previous years’ HCCs are “thrown out” and must be reassessed and documented in order to count towards the scoring for the current year. Further, under this capitation model, HCCs play an important role in ensuring the revenue health of health systems that have adopted an ACO model to care for Medicare and other managed care populations. Figure 1 shows the elements used to comprise the HCCs.

The recording of HCCs is dynamic and provider-controlled through the selection of valid ICD-9 codes and thorough, compliant supporting documentation maintained in the patient’s medical record with the majority of information being captured through face-to-face encounter of Evaluation and Management codes, hospital discharge summaries, hospital outpatient documentation and ambulatory surgery encounters. ICD-9 codes for Laboratory, Radiology, durable medical equipment (DME) and Hospice care are excluded. To take full advantage of HCCs under ICD-9, and especially in the future under ICD-10, it becomes increasingly important to code with as much specificity as possible and to avoid codes that have “not elsewhere classified” in their descriptions or are non-specific in nature, because similar codes have vastly different values. For example, Depressive disorder, not elsewhere classified [311] has no HCC value, however, Depression, major [296.20 BT] has a value of 0.353. It’s equally important that providers and coders do not rely on default codes that may be pre-loaded in the electronic health record (EHR) and don’t offer the needed specificity to achieve success with the HCC model.

How is Capture of HCCs Accomplished?

Clinical documentation improvement is the key along with consistent education to providers on the requirements of HCC and the financial impact that accurate identification of hierarchical conditions can have on an organization’s bottom line. Without a reliable and robust EHR, it may be nearly impossible to identify HCC codes that apply to the patient and it will be equally difficult to identify codes that need billing during a particular calendar year. Organizations can find alternative ways to accomplish the capture of HCCs by accessing best practice advisories or other industry resources. One means of accomplishing this may be through auditing provider documentation and making the correlation to documented diagnosis as a first step. Providers who are part of a larger healthcare system must be willing to dedicate time to the management of the population and helping to protect the organization’s revenue by embracing the challenge and seizing every opportunity to identify and document HCCs effectively. Feedback to the provider based on prospective audits can serve to prompt providers to improve their documentation and HCC capture efforts when coming to the realization that their actions alone will drive improved reimbursement for their employers and healthier outcomes for their patients.

What do HCCs Mean in Terms of Revenue?

Healthcare systems that have created and adopted an ACO model must pay particular attention to the fact that due to the proven success of HCCs in predicting the resource use by Medicare Advantage enrollees, many managed care plans that participate in hospital value-based purchasing to care for their populations have also adopted the HCC model. In doing so, these managed care plans are willing to incentivize healthcare systems when they implement or participate in programs to ensure HCCs are captured each year for the populations for which they care for. Timely submission of relevant claims containing diagnosis codes which are used to calculate HCCs may mean that the healthcare system might qualify to receive additional payments from the managed care organization for completing the documentation requirements as well as benefiting from higher reimbursements for the coming year for treating those patients. Depending on the size and complexity of the population being cared for, improving the capture of HCCs could mean millions of dollars to an organization’s bottom line.


Gerry Baker, MBA, is the owner of McGraw Baker Consulting, LLC, an independent consultancy, who has 24 years of healthcare consulting experience. His clients include hospitals and physician practices where he focuses on assisting them to improve their revenue cycle and financial management processes. Mr. Baker can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..


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