The CMS-HCC risk adjustment model is prospective—it uses demographic information (age, sex, Medicaid dual eligibility, disability status) and a profile of major medical conditions in the base year to predict Medicare expenditures in the next year. It is calibrated on the FFS population because this population, unlike the MA population, submits complete Medicare claims data, including both diagnoses and expenditures. Determining which diagnosis codes should be included, how they should be grouped, and how the diagnostic groupings should interact for risk adjustment purposes was a critical step in the development of the model. The following 10 principles guided the creation of the CMS-HCC diagnostic classification system:
- Principle 1 – Diagnostic categories should be clinically meaningful.
- Principle 2 – Diagnostic categories should predict medical expenditures.
- Principle 3 – Diagnostic categories that will affect payments should have adequate sample sizes to permit accurate and stable estimates of expenditures.
- 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.
- Principle 5 – The diagnostic classification should encourage specific coding.
- Principle 6 – The diagnostic classification should not reward coding proliferation.
- Principle 7 – Providers should not be penalized for recording additional diagnoses (monotonicity).
- Principle 8 – The classification system should be internally consistent (transitive).
- Principle 9 – The diagnostic classification should assign all ICD-9-CM codes (exhaustive classification).
- Principle 10 – Discretionary diagnostic categories should be excluded from payment models.