Understanding the Fundamentals of HCC Risk Adjustment Coding

HCC Risk

HCC coding is used to determine a patient’s risk score or RAF. This is based on their diagnosis and demographics. RAF scores predict a patient’s medical costs over time. This model is essential in value-based healthcare and helps communicate a patient’s true complexity to payers. However, HCC coding requires more detail and specificity than previously used code sets.


The most widely used medical coding system in healthcare is called ICD-10-CM, or International Classification of Diseases, Tenth Revision, and Clinical Modification. It’s a seven-character alphanumeric code that lists the injury or disease with up to two subclassifications, indicating the cause, manifestation, location, severity, and type of injury or illness. HCC coding is essential for risk adjustment coding because it allows for an accurate depiction of a patient’s true complexity. This is a key part of value-based healthcare, where healthcare organizations are reimbursed at higher rates for patients with more chronic conditions.

A patient’s medical conditions must be documented and coded appropriately in ICD-10-CM for these reimbursements. Most of this documentation comes from face-to-face physician encounters, with only a small percentage coming from inpatient encounters. The more conditions a patient has, the more expensive they’ll be over the long term. This is why CMS uses demographic data and diagnosis codes to establish a patient’s risk score, known as an RAF score, which is then used to determine their reimbursement rate. 


The medical coders who document patient visits need to be more accurate than ever. This includes a more comprehensive understanding of HCCs and greater specificity regarding a patient’s conditions. For example, a coder must know whether a patient has cytomegalovirus or hepatitis C, pneumonitis, or pancreatitis. ICD-10 mandates more detail and granularity in this regard than previous iterations of codes.

As healthcare moves away from fee-for-service payment models and toward value-based reimbursement, risk adjustment code diagnosis HCC becomes an even more critical part of the process. The more a healthcare organization understands its patients and how complex their health status is, the better it will be able to communicate those characteristics to payers.

To help healthcare organizations better understand their patients, many payers are offering HCC coding education to staff members across the organization. This could include clinicians, nurses, case managers, operations, and administrative staff. This new coding methodology impacts Medicare capitation payments to healthcare organizations for enrollees in the largest single-payer in healthcare, the Centers for Medicare and Medicaid Services (CMS). Healthcare organizations that need to document their patient’s health status this way properly may experience lower reimbursement rates. As we move further into value-based care, this scenario could be costly to all parties.

Hierarchical Condition Categories

Hierarchical Condition Categories (HCC) is a system for documenting patient conditions that helps identify their likelihood of needing extensive medical treatment. Healthcare organizations use this information to receive proper reimbursements for care. The HCC system improves upon previous risk adjustment models by incorporating data from clinical diagnoses rather than only demographic characteristics.

Using ICD-10-CM diagnosis codes, health plans submit HCCs to CMS or the government agency overseeing their risk adjustment program to calculate a member’s risk score each calendar year (CY). The higher the risk score, the more a plan pays to treat its members. During the coding process, healthcare professionals must ensure all HCCs supported by documentation are submitted to each CY. Missed diagnoses will negatively impact a provider’s ability to characterize risk and enhance shared savings opportunities accurately. The risk adjustment model adds the values of all ICD-10-CM codes that map to each HCC family to determine a member’s overall risk score. HCCs are grouped into diagnosis groups or hierarchies based on common cost patterns and severity. For example, pulmonary diseases are in the same hierarchy as cardiovascular diseases, and both have high costs.

The higher the total value of a health plan’s risk-adjusted HCCs, the better. This is a significant reason why healthcare organizations must optimize their EMR, data, analytics, and education to enable more accurate coding and documentation of patient conditions.


A health insurance company uses a patient’s ICD-10-CM-coded diagnoses to calculate the risk adjustment factor (RAF) score. This is then used to predict medical costs for that patient over a year possibly. For example, patients with fewer health conditions are expected to have lower-than-average medical expenses. In contrast, patients with multiple chronic health issues are expected to have higher expenses. RAF scores are also used to help Medicare Advantage organizations match insurance payments accurately to the resource requirements of their Medicare Advantage population. However, to do this, medical organizations must have accurate HCC coding. This requires physicians to fully document patients’ medical needs and choose the correct codes to capture in their clinical notes. Unfortunately, it’s not always easy to do this. Many healthcare organizations need help to meet the high standards required for HCC coding. One estimate suggests that 80% of the diagnoses documented in a medical note are not on the claim form. This is because doctors are often busy focusing on treating their patients, not documenting all the information needed for a complete and accurate diagnosis code selection.