It doesn't work now ofc, b/c it does not exist! But it could work however we make it to work! It is only subject to the constraints of like logical possibilities plus technical implementation effectiveness. e.g., just like the language options, or applying a NSFW or spoiler tag (currently the former only applies to posts while the latter only applies to comments), when someone makes a community they could make their own selections as to which categories they want to be listed under. It could be hierarchical - e.g. "hockey" could presume "sports" but not the reverse - or not, in which case the latter would be interpreted more as a "sports, general" or "sports, other" category, rather than a super-category that includes other sub- ones.
And, just like the language options and NSFW/spoilers, people will forget to mark their communities/posts/comments, so that model could never be a perfect solution. Then again, nothing else will ever be perfect either so... it is no reason not to try? Especially if enough people and enough communities DO want it.
Anyway I am not a Lemmy developer, just saying that I hope that such a thing may come here, eventually, to make it more welcoming to newcomers, so that they don't have to spend hours and hours subscribing to this and that and also blocking others. :-)
But right now, the connection issues and defense against hostile attackers spamming the Fediverse with CP are much more major considerations, so I do not believe it will come anytime "soon".