What is HCC Coding? Understanding the Risk Adjustment Model

Touseef Riaz

August 14, 2021

HCCS Healthcare Coding and Consulting Services

In 2020, there were over 20 million patients who participated in the Medicare Advantage Plan, making up one-third of all Medicare patients. As enrollees continue to grow every year, this number is expected to increase this year, paving the path for HCCs and the idea of risk adjustment to gain momentum.

HCC or Hierarchical Condition Categories is not a novel concept. In fact, it has been around for the last two decades but was under the wraps before.

Until now.

The reason for the renewed discussion on the subject is due to the fact that more and more organizations are shifting towards value-based care, realizing that without a base in HCC coding, they have a risk of getting lower rates of reimbursement, or not getting paid at all.

The process of coding and submitting claims for the medical services provided is documented carefully, as the data is used to find out if a service meets the criteria set forth and thus determines the amount that the patient has to pay from the total bill. To start with, CPT codes specifically describe the procedure or service provided and the ICD-10 codes provide support for medical necessity. Together, the payment amount is established. With HCC risk adjustment coding, this approach may be changing as new payment methods shift risk from the payer to the provider.

What are HCCs?

Hierarchical Condition Categories are a set of clinical codes that correspond to specific medical diagnoses. Used by the Centers for Medicare and Medicaid Services since 2004, HCCs apply a risk-adjustment model that identifies patients with chronic or serious conditions.

Using the model, Medicare is able to project the expected risk and future annual cost of care. Each HCC represents diagnoses with similar clinical complexity and expected annual care costs.

So what is HCC coding? Through HCCs, CMS reimburses Medicare Advantage plans defined by the health of the patients and accurately pays for the predicted cost expenditures of patients by adjusting those payments based on demographic information and patient health status. The risk assessment data used is based on the diagnosis information pulled from claims and medical records which are collected by physician offices, hospital inpatient visits, and outpatient settings.

What is Risk Adjustment? 

Risk adjustment applies a methodology to assign a risk score to the health status of a person, projecting the healthcare costs that may be incurred. This way, adjustments are made to patients with anticipated lower healthcare costs as well as predicting the risk associated with a patient with expected high healthcare costs.

You might be familiar with the fee-for-service (FFS) payment model where insurance vendors pay to the healthcare providers based on the services and patients provided to a patient. With risk adjustment, the payment model gets altered in a way that the insurance companies get paid for managing the healthcare needs of patients based on their diagnoses and risk factor.

Since risk adjustment plans are developed and administered by government entities, it ensures that insurance companies and vendors do not discriminate against anyone, no matter the demographics or the limit on the range of expected healthcare costs. The case mix of both healthy and sicker patients, and the cost-sharing of expenses spread across all members, is designed to provide access to quality healthcare regardless of health status and history.

HCC Structure

The HCC structure uses two main sources of data to decide a patient’s risk factors: health status and demographic characteristics. The health status is based on the ICD-10-CM diagnosis codes and the demographic data incorporates information such as age, gender, and so on.

Getting the demographic data and processing it for HCC is straightforward, whereas identifying and validating the health status from the diagnosis can become pretty complicated. First, the HCC model organizes conditions and diseases into diagnostic groups. The groups are further divided into condition categories. HCC medical billing and coding thus applies ICD-10 diagnosis codes to represent the conditions with similar cost patterns.

HCC Coding Guidelines

When it comes to the actual coding of HCCs, there are three base steps involved:

  •  Validation of medical record eligibility
  • Assignment of appropriate ICD-10-CM codes
  • Submission of ICD-10-CM codes to CMS or HHS for reporting

During the process, it is important for the coder to analyze the health record documentation and identify the key reportable conditions. Next, assign the correct ICD-10-CM codes to the identified conditions is required. ICD-10-CM coding for HCC reporting is different from traditional ICD-10-CM coding because the intent is to report all conditions that affect the individual’s health status concurrently across the continuum of care.

The Importance of HCC Coding

Hierarchical Condition Category coding allows for:

  • Better communicating patient complexity
  • Predicting healthcare resources utilization as well as adjusting cost and quality metrics
  • Better cost and quality performance measurement based on patient complexity


HCC aims for an overall better health management process plus accurate reimbursements from Medicare Advantage plans. To achieve this goal, responsibility rests on the healthcare providers to ensure that they apply appropriate diagnosis codes along with complete documentation. Medical coders and medical coding service providers, need to be up to date with the HCC medical billing and coding practices. Reporting a complete picture for the risk adjustment factor through HCC increases the accuracy of the patient score and ideally, reduces the need to request medical records or audit provider’s claims. When done correctly, HCC streamlines the process creating clean claims and allowing for fast reimbursements.

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