Understanding the Importance of HCC Capture in At-Risk Contracts

April 1, 2021
April 1, 2021

The following blog post is based on an October 2, 2017 article in HFMA Magazine by Donna M. Smith, RHIA and L. Gordon Moore, MD of 3M Health Information Systems.

As hospitals take on more at-risk contracts in the value-based payment era, it is increasingly important that financial officers understand how the health status of contracted populations is calculated in those contracts. Appropriately documenting and coding a patient’s full illness burden is essential to the financial health of hospitals.

Predicting Cost of Care and Stratifying Risk: HCCs

Medicare and Medicare Advantage plans use HCCs (hierarchical condition categories) to quantify the illness burden of each patient and to estimate the annual cost of providing care for that patient. Examples of HCCs are congestive heart failure, COPD, chronic kidney disease, and ischemic or unspecified stroke.

HCCs are weighted using a risk adjustment factor (RAF) based on the complexity of the patient’s disease, along with demographic factors such as age, gender, and patient domicile (living at home or a skilled nursing facility, for example). These RAF scores, similar in theory to a DRG relative weight, are calculated annually based on 12 months of documented diagnostic coding history.

Aggregating scores across a contracted population projects the fixed revenue associated with that population. According to a 3M claims analysis of patient encounters in an integrated delivery system, approximately 80% occur in physician offices and clinics, so HCC capture most often falls to office-based physicians than to physicians providing care in hospitals.

Financial Impact of Under-Coding

When patient conditions do not make it into the EHR, whether due to poor clinical documentation or more than a 12-month gap between patient encounters, the financial impact can be disastrous. If the provider fails to document HCCs or coexisting disease conditions, the RAF score will be lower than it should be, resulting in lower capitated payments.

Consider the example of a 76-year-old patient named Doris who lives at home with her daughter and manages multiple chronic conditions. in 2015, Doris’s primary care physician and cardiologist documented a total of six diagnoses:

  • Diabetes with retinopathy (HCC 18, relative factor of 0.368)
  • Morbid obesity (HCC 22, relative factor of 0.365)
  • Rheumatoid arthritis (HCC 40, relative factor of 0.374)
  • CHF (HCC 85, relative factor of 0.368)
  • Abdominal aortic aneurysm without rupture (HCC 107, relative factor of 0.299)
  • COPD (HCC 111, relative factor of 0.346)

When added together with a demographic score and two HCC interaction scores, Doris’s 2015 risk adjustment factor was 2.998. Multiplied by a typical baseline PMPM payment of $800, the individual monthly payment for this patient came to $2398.

By contrast, in 2016, Doris saw her primary care physician only once and did not see her cardiologist. The primary care physician documented three diagnoses:

  • Diabetes without complications (HCC 19, relative factor of 0.118)
  • Obesity (unlike morbid obesity, not an HCC under the CMS model)
  • COPD (HCC 111, relative factor of 0.346)

Doris’s 2016 RAF was 0.901 and the monthly individual patient payment for Doris came to $720.80. In short, the MA plan would be paid $1678 less per month for Doris in 2016 than 2015, amounting to a huge difference in the annual payment of more than $20,000.

Consequences of Errors and Over-Reporting

In contrast, over-reporting HCCs and risk will earn scrutiny by auditors from CMS and other health plans. The most recently reported CMS risk-adjustment data validation audits (based on CY2014 payments) identified $14.4 billion or 8.3% in improper payments to part C supplemental plans.

The 10 HCCs with the highest rate of errors in 2014 were:

  1. Ischemic or unspecified stroke
  2. Cerebral hemorrhage
  3. Aspiration and specified bacterial pneumonias
  4. Unstable angina and other acute ischemic heart disease
  5. End-stage liver disease
  6. Diabetes with ophthalmologic or unspecified manifestation
  7. Drug/alcohol psychosis
  8. Long, upper digestive tract, and other severe cancers
  9. Vascular disease with complications
  10. Major complications of medical care and trauma

CMS audits are here to stay, and it’s only a matter of time before Medicare Advantage plans start conducting their own audits of providers to claw back overpayments. Clearly, clinical documentation improvement (CDI) is essential to financial health in the age of value-based payments. To learn more about CDI resources available from nThrive and HealthStream’s Revenue Cycle solutions, visit