Provider organizations that take on financial risk know margins depend on accurately accounting for patient complexity. However, monitoring that complexity is starting to play an important role for individuals and organizations with almost any kind of relationship with Medicare.

Skimping on the effort it takes to accurately account for patient complexity leads to what most providers simply can’t afford: inadequate reimbursement for the services they deliver to the sickest patients.

Centers for Medicare and Medicaid Services uses a method of accounting for complexity called Hierarchical Condition Categories (HCC) to adjust payments for services provided to Medicare Advantage (MA) beneficiaries. HCC codes correspond to billed diagnoses and their projected treatment costs.

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Diagnoses of greater complexity (and treatment cost) are associated with HCCs that have higher weighted values. Patient populations that have higher HCC value, in aggregate, are assigned a higher overall Risk Adjustment Factor (RAF), which translates to a higher per member, per month (PMPM) payment.

HCCs are a focal point in the industry for two reasons.

First, Medicare Advantage roles are expanding quickly. Even providers that don’t yet have a significant book of Medicare Advantage business should expect it to have some impact on their financial futures.

Second, risk-adjusting payments are needed beyond Medicare Advantage, for which CMS broadly favors the HCC method. It is used to allocate resources among commercial plans that accept beneficiaries from the exchanges, per the Affordable Care Act.

It is also used to risk-adjust reimbursement for entities that participate in value-based payment models, such as the Medicare Shared Savings Program or the Next Generation ACO Model.

Most recently, CMS will begin adjusting payments to individual providers for fee-for-service Medicare, which are expected to be based in part on the HCC-related diagnoses they document in 2017 and beyond, under the Medicare Access and CHIP Reauthorization Act (MACRA).

As HCCs increasingly affect healthcare spending and gain traction among private health plans as a method for adjusting commercial payment, most providers will be affected. We have identified a few early lessons for those looking to ensure they are prepared to properly account for complexity.

No reimbursement without provider attention. One HCC concept for providers to master is often referred to as “HCC capture.” To receive adjusted Medicare payments, a qualified provider must evaluate chronic diseases during a face-to-face encounter with a patient and then record relevant diagnoses on the patient’s bill. If diagnoses are not billed, they don’t trigger HCC credit.

The mere presence of chronic disease within a patient population doesn’t drive higher reimbursement but direct intervention with a disease does.

This way of accounting also marks an important departure from the norms of fee-for-service reimbursement, where billed procedure codes determine the size of the check received, often without regard to the disease or the severity of the disease being treated. As such, two capabilities are critical to managing revenue in the HCC regime: recognizing the opportunity to evaluate chronic diseases and accounting for those diagnoses with a high degree of specificity on the bill.

Revenue retention rests on sound documentation. HCC documentation is just as important as HCC capture. Documentation of chronic diagnoses in a patient’s medical record must meet minimum standards to justify HCC-based reimbursement in the event of an audit. Put another way: What qualifies the organization for incremental payment in the near term (HCC capture) does not automatically pass scrutiny as to the appropriateness of that payment down the line. It’s the HCC documentation, rather than the HCC capture, that validates billing for a particular diagnosis.

Given how CMS approaches Risk Adjustment Data Validation (RADV) audits, insufficiently documenting HCCs could easily amount to seven- or eight-figure financial penalties. (Recovery Audit Contractors compare payments made to a provider with the payments that are deemed accurate and reasonable based on the provider’s documentation of evaluation and management of chronic disease. This comparison is performed using a sample of records, and the error rate is extrapolated to calculate a net “overpayment” made by Medicare across the provider’s attributed patient population.)

Of course, better documentation is a worthy goal on the clinical merits alone, as it serves as one of the best reminders to clinical staff that a patient’s condition requires attention and re-evaluation. Suffice to say, setting a standard for documentation should be a priority for providers.

Performance management requires mastery of data and information tools. Sustaining and executing against both HCC capture and HCC documentation requires data and technology. Other efforts such as education campaigns, trend analysis, coder reviews and opportunity reports might help improve performance but fall short if they’re not informed by the right data and organized by information technology. Worse, providers might abandon them altogether if they prove to be too burdensome.

The entire effort becomes more efficient and effective when best practices are integrated into existing patient evaluation, billing and documentation workflows using IT. Provider organizations that combine billing and claims data with clinical data from its EHRs can better identify known HCC gaps by up to 30 percent. And providers who gain visibility into HCC capture and documentation opportunities at the point of care in the EHR can improve HCC gap closure by 300 percent.

That said, many providers don’t have access to the assistive tools needed and are unprepared to face the challenges of HCC-adjusted payment. In the months ahead, health systems will need to fill this void. Until then, providers will struggle to manage and deliver this crucial component of value-based care.

John Kontor, MD, is Executive Vice President, Consulting at Advisory Board

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