Hierarchical Condition Categories (HCCs) are a standardized method used primarily within the Medicare system to classify the health status of a patient population. Developed by the Centers for Medicare & Medicaid Services (CMS), this system groups related medical diagnoses that indicate similar expected healthcare costs and complexity of care. HCCs form the foundation of a risk adjustment model designed to estimate the future resources a patient is likely to consume. The core function of an HCC is to translate a patient’s chronic health conditions into a numeric value that predicts their overall resource needs.
Why Condition Categories Were Created
The need for HCCs stemmed from the payment structure within programs like Medicare Advantage (MA), which pays private health plans a fixed, per-person rate to cover all medical services. Without a system to account for differing levels of sickness, plans would receive the same payment for a healthy person as for a patient with multiple chronic illnesses. This flat-rate model incentivized health plans to enroll healthier patients while avoiding those with complex medical histories, a practice known as “cherry-picking”.
The HCC system addresses this imbalance through risk adjustment, a statistical methodology that adjusts the payment rate based on the expected medical costs of each enrollee. Plans are paid more for members expected to cost more and less for those who are healthier. This mechanism ensures that plans caring for populations with greater health burdens, such as chronic conditions, receive appropriately higher payments to cover the intensity of care required. The model aims to ensure financial stability so health plans can provide comprehensive care to all beneficiaries.
Translating Diagnosis into an HCC
Converting a patient’s medical condition into an HCC begins with accurate clinical documentation by the healthcare provider during a face-to-face visit. The provider must clearly document all chronic and severe acute conditions that are actively managed, monitored, or treated during the encounter. This documentation forms the basis for the subsequent coding process.
Professional medical coders review the clinical notes and assign specific codes from the International Classification of Diseases, Tenth Revision (ICD-10-CM) to each documented diagnosis. Only certain ICD-10 codes, representing conditions that significantly impact healthcare costs, are selected to “map” to a specific HCC. A single HCC, such as one for heart failure, may encompass numerous distinct, clinically related ICD-10 codes.
Chronic conditions must be re-documented and submitted annually. If a patient’s long-term diagnosis, such as chronic obstructive pulmonary disease (COPD), is not captured on a claim each calendar year, the condition “falls off” the risk profile. The health plan will not receive payment for managing that disease in the following year. This annual cycle drives the need for consistent documentation across all specialties that treat the patient.
Understanding the Hierarchical Structure and Scoring
The “Hierarchical” aspect means that not all conditions contribute independently to the final risk score. The model organizes related conditions into families, where a more severe diagnosis supersedes, or “trumps,” a less severe one. For example, a patient with both uncomplicated diabetes and diabetes with severe complications will only have the score for the more severe condition counted. This structure prevents the double-counting of related conditions and ensures the score reflects the highest level of complexity within a disease category.
The output of the HCC calculation is the Risk Adjustment Factor (RAF) score, which represents the patient’s predicted resource needs. The RAF score is determined by summing coefficients assigned to two main components. The first is a base score derived from demographic factors, including the patient’s age, sex, and eligibility for Medicare and Medicaid.
The second component is the sum of the weighted scores from all the patient’s captured HCCs. Each HCC has a specific weight that reflects the expected cost of care for that condition, with higher weights assigned to conditions that are more severe or costly to manage. The final RAF score is the combined total of the demographic score and the sum of the hierarchical condition scores, serving as a single numeric measure of the patient’s overall health burden and predicted cost.
How HCCs Influence Provider Funding and Patient Care
The RAF score calculated through the HCC model directly dictates the level of funding a health plan receives from CMS. A higher RAF score indicates a sicker patient population and results in a higher per-member, per-month payment to the Medicare Advantage plan. Conversely, a lower score leads to a reduced payment. This structure incentivizes plans to accurately capture the full extent of their members’ health conditions.
Appropriate funding, derived from accurate HCC documentation, allows health plans to invest in comprehensive care management programs. Plans with high-risk populations use the increased resources to offer specialized services, care coordination, and interventions tailored to the complexity of their members’ chronic illnesses. This link between accurate risk scoring and funding promotes better patient outcomes by ensuring resources are allocated where they are most needed.
To ensure the integrity of the system, CMS conducts audits known as Risk Adjustment Data Validation (RADV). These audits check whether the HCC codes submitted by the health plan are fully supported by the patient’s medical record documentation. RADV audits prevent the overstatement of patient sickness to receive excessive payments and maintain the accuracy and fairness of the risk adjustment model.