What you need to know about coding in value-based care

Tammy Schaeffer: ©Plante Moran

Value-based care (VBC) continues to become a mainstream reality for health care providers. While a patient may not notice a difference between a value-based or a fee-for-service (FFS) approach, there is a stark difference for physician practices. It represents a complete paradigm shift.

VBC is a necessary approach that allows physicians to care for the whole person and promote strong global outcomes by prioritizing a preventative focus and redressing barriers to care. Whereas FFS promotes episodic treatment of the main presenting problem, VBC aims to encourage proactive care for the whole patient, with the reimbursement to support it. It’s a welcome concept for most physicians, yet this paradigm shift in care management also requires some pivotal shifts in practice management.

Case in point: Coding.

Redefining coding’s role

Coding has played a crucial role in practice revenue streams for decades. In the FFS environment, where practices are paid for each service delivered, Current Procedural Terminology (CPT) codes essentially set the reimbursement bar. Each CPT code describes a discrete service and carries a distinct payment rate. The more often patients come in for services, the more CPT codes are billed, and the more the practice earns.

ICD-10-CM diagnosis codes are primarily used in FFS reimbursement to indicate why patients’ services are medically necessary. They provide valuable diagnosis information. A patient’s ICD-10-CM diagnoses may influence whether a health plan will pay for the services represented by the CPT codes, but the CPT codes drive fee amounts.

As practices transition from volume-based FFS to risk-based VBC, coding takes on a fundamentally different role.

Moving from volume to value

In VBC arrangements, practices aren’t paid based on the type and frequency of service delivery. Instead, they’re paid based on each patient’s expected total cost of care.

That expected cost is determined based on the risk presented by the patient, including their age, home environment, and other health risks that importantly include their chronic health conditions. Because chronically ill and medically complex patients are expected to need more care to be managed successfully, their expected cost of care is higher. In VBC arrangements, practices are rightfully reimbursed more to care for these patients than for less medically complex patients.

So, how is diagnostic complexity (i.e., risk) calculated? That’s done through a third code set not used in FFS: the Hierarchical Condition Categories (HCC) codes.

Introducing HCC

The HCC coding system is monumentally different from CPT and ICD-10-CM, and it’s potentially life-changing for physicians (in a good way), because it plays a critical role in aligning reimbursement with whole-person care management.

HCC codes were first adopted by the Centers for Medicare & Medicaid Services for the purpose of assigning risk scores to patients. Each HCC code maps to specific ICD-10-CM codes, and is assigned a weighting intended to reflect the expected risk presented by the diagnoses. This weighting is commonly referred to as the “RAF,” which stands for the “risk adjustment factor.”

In simplest form, the total risk adjustment afforded to each patient is calculated by combining a base figure for the patient’s demographic with the conglomerate of all of the disease weightings. There may also be a slight bump up to account for the risks presented by certain conditions and patients who have higher numbers of conditions.

HCC Version 28, which takes full effect in October 2025, is made up of 115 HCC codes. Each code describes mostly chronic conditions such as diabetes, congestive heart failure, or kidney disease, all of which substantially impact overall care costs and clinical outcomes. However, it’s also important to note that not every ICD-10-CM diagnosis code rolls up to an HCC code.

Each HCC code is weighted according to the average cost of the condition, the amount of work it takes to manage that condition, and the anticipated cost of care for a patient with that condition. Patients with a higher RAF are considered to present a higher risk and require more effort and emphasis to manage.

In full risk arrangements, the patient’s total RAF is then multiplied by the physician’s managed care contract rate to determine the payment the physician receives to care for the patient. These figures are also utilized in calculating other risk-stratified elements such as partial risk performance, shared savings targets, and even quality outcomes measures in some instances.

Physicians who keep patients healthier at a cost lower than their reimbursement get to keep the difference. Conversely, physicians may lose money if worsening health conditions cause a patient’s costs to rise above the contracted payment rate.

In short, the shift to HCC coding at long last provides physicians the opportunity to proactively treat the whole person, while also creating appropriate reimbursement for the extra work and effort required to drive great clinical outcomes for sicker and more complex patients.

Navigating VBC coding

There are a few other key differences between FFS and VBC coding. Here are some other things to be aware of as you navigate this paradigm change:

Care plans related to HCC codes must be documented and executed. In FFS, there is no real penalty when conditions denoted by ICD-10-CM codes aren’t managed. In stark contrast, VBC requires evidence that each condition indicated by an HCC code is being actively addressed and managed. Documentation is subject to Risk Adjustment Data Validation (RADV) audits, and the penalties are steep. To ensure RADV compliance, physicians may want to ensure their documentation follows the common mnemonic “MEAT:”

Monitor—e.g., watching the patient’s progress after initiating a prescription medication

Evaluate—e.g., ordering more lab tests or requesting evaluation or medical records from another provider

Assess—e.g., determining whether treatment is working, or a disease is progressing

Treat—e.g., modalities such as a procedure, physical therapy, etc.

Furthermore, when conditions resolve, physicians should document the resolution to ensure accuracy in their coding.

HCC codes “reset” every year. ICD-10-CM codes may stay on a patient’s medical record for their entire life. Not so with HCC codes. HCC-related conditions “reset” annually, meaning they must be redocumented where they remain unresolved in order to ensure appropriate risk adjustment. Failing to do so can result in a drastic reduction of risk scores, which can lead to delayed treatment and underpayment. For this reason, capturing diagnoses and care plan execution at every visit counts significantly more in a risk-based environment.

From an operational perspective, this aspect of HCC coding encourages practices to put processes in place to ensure all patients are seen at least once a year, with those at higher risk seen much more frequently. Indeed, accessibility is the leading indicator for VBC success. Everyone benefits when physicians can proactively address conditions in the practice setting, rather than waiting for them to escalate into emergency treatment and hospitalization.

Collaborating to enhance patient care

VBC promotes stronger diagnosis identification and documentation, earlier interventions, and more holistic management of patients’ conditions. Although there are fundamental differences between VBC and FFS, strategies that help practices thrive in VBC can be beneficial in FFS environments as well.

To be successful, every person within a practice must have at least a high-level understanding of how VBC coding and risk adjustment work.

Organizations must establish key processes to support the transition, including investing in HCC education and training (available from many organizations) for physicians and coders. Providers should not assume FFS coders are adept at risk-based coding. Instead, consider investing in a risk-based coder who can help educate physicians and other providers on HCC requirements.

Most of all, VBC arrangements emphasize that it’s more imperative than ever for care teams to function as one. This includes working closely with payers, who can assist practices by providing the necessary data and reports to ensure patients receive the care they need.

By taking a team- and value-based approach, physicians can truly deliver the whole-person care they want to provide.

Tammy Schaeffer, RN, JD, is a principal at Plante Moran.