Risk adjustment of Medicare capitation payments using the CMS-HCC model

Health Care Financing Review,  Summer, 2004  by Gregory C. Pope,  John Kautter,  Randall P. Ellis,  Arlene S. Ash,  John Z. Ayanian,  Lisa I. Iezzoni,  Melvin J. Ingber,  Jesse M. Levy,  John Robst

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This article describes the DCG/HCC and CMS-HCC models. The next section describes the DCG/HCC model, including the principles and elements of its diagnostic classification system and how its performance compares to earlier models. We then describe the modifications to accommodate the simplified data that lead to the CMS-HCC model. The final section describes the CMS-HCC model adaptations for subpopulations.

DCG/HCC MODEL PRINCIPLES

Diagnostic Classification System

The following ten principles guided the creation of the diagnostic classification system.

Principle 1--Diagnostic categories should be clinically meaningful. Each diagnostic category is a set of ICD-9-CM codes (Centers for Disease Control and Prevention, 2004). These codes should all relate to a reasonably well-specified disease or medical condition that defines the category. Conditions must be sufficiently clinically specific to minimize opportunities for gaming or discretionary coding. Clinical meaningfulness improves the face validity of the classification system to clinicians, its interpretability, and its utility for disease management and quality monitoring.

Principle 2--Diagnostic categories should predict medical expenditures. Diagnoses in the same HCC should be reasonably homogeneous with respect to their effect on both current (this year's) and future (next year's) costs. (In this article we present prospective models predicting future costs.)

Principle 3--Diagnostic categories that will affect payments should have adequate sample sizes to permit accurate and stable estimates of expenditures. Diagnostic categories used in establishing payments should have adequate sample sizes in available data sets. Given the extreme skewness of medical expenditure data, the data cannot reliably determine the expected cost of extremely rare diagnostic categories.

Principle 4--In creating an individual's clinical profile, hierarchies should be used to characterize the person's illness level within each disease process, while the effects of unrelated disease processes accumulate. Because each new medical problem adds to an individual's total disease burden, unrelated disease processes should increase predicted costs of care. However, the most severe manifestation of a given disease process principally defines its impact on costs. Therefore, related conditions should be treated hierarchically, with more severe manifestations of a condition dominating (and zeroing out the effect of) less serious ones.

Principle 5--The diagnostic classification should encourage specific coding. Vague diagnostic codes should be grouped with less severe and lower-paying diagnostic categories to provide incentives for more specific diagnostic coding.

Principle 6--The diagnostic classification should not reward coding proliferation. The classification should not measure greater disease burden simply because more ICD-9-CM codes are present. Hence, neither the number of times that a particular code appears, nor the presence of additional, closely related codes that indicate the same condition should increase predicted costs.