Most surgeons are acquainted with the billing and coding aspects of their fee-for-service (FFS) work in the office, hospital, and operating room. Both evaluation and management (E&M) and procedural services are assigned Current Procedural Terminology (CPT®) codes that define these services, as well as International Classification of Disease (ICD) codes to denote diagnoses and indications for the activities. In turn, CPT codes are billed and reimbursed through various pricing and scaling approaches, depending on contractual relationships between providers, institutions, and payors. In most federal payment programs administered by the Centers for Medicare and Medicaid Services (CMS), each CPT code is reimbursed according to the Physician Fee Schedule. The fee schedule assigns Relative Value Units (RVUs) to each E&M service to denote normalized, quantitative measures of work effort and expertise required to deliver the unit of service. These systems are discussed in greater detail in other chapters of this issue of Seminars.

For decades, the US health care reimbursement infrastructure has been evolving toward alternatives to pure FFS reimbursement (Fig. 1), in order to reduce incentives for excess care and incentivize value-based improvements in healthcare utilization and efficiency. Payment systems that compensate hospitals and health systems for entire episodes or bundles of care or give capitated responsibility for total healthcare costs of covered lives, have necessitated the development of coding systems that account for more comprehensive assessments of cost and work.

This article describes the origins and applications of Diagnosis-Related Groups (DRGs), for the classification of complexity and expected cost of inpatient hospital stays, and Hierarchical Condition Categories (HCCs), for prospective risk-adjusted assessment of expected total healthcare costs for individuals. These coding systems are essential to the administration and financial management of healthcare organizations and an understanding of their underpinnings will give surgeons important insights into their institutions’ imperatives to optimize reimbursement and strategies for success in alternative payment programs and modern quality and outcomes assessment.