Accounting Information Systems
and the U.S. Health Care Industry
David M. Shapiro is a fraud-risk and
financial-crimes specialist. He is an
expert on financial investigations
and law enforcement. His extensive,
diverse background includes work
as an assistant professor at the John
Jay College of Criminal Justice, FBI
special agent, prosecuting attorney
in New Jersey, corporate investigator
in New York City, and certified public
accountant in NJ.
© Business Expert Press 978-1-94858-037-3 (2018)
www.businessexpertpress.com
David M. Shapiro
Abstract: This article explores the relationship between
accounting information systems and the U.S. health care
industry. When it comes to describing the U.S. health
care industry, “system” may not be the most apt word
choice as it is characterized by numerous private- and
public-sector practitioners and intermediaries, ­including
third-party payers, such as insurance companies, that
are not entirely subjected to centralized direction and
control at the civil society level. Thus, the accounting
information system (AIS) is required to provide the
­
means and methods to recognize, measure, and disclose
performance indicators ranging from billing practices
to patient outcomes. The natural language is techni-
cal and not widely understood outside of a given field
or even subfield; the artificial or coding languages are
designed to be used by clerical employees and agents,
but they refer to conditions and courses of treatment
beyond the ken of these key human resources. Making
sure the AIS provides ­accurate, complete, and timely
­reports for ­internal and external users demands rigorous
review and approval, and inspection and oversight at the
­officer and director levels lest health care fraud become
a real problem: The layers of actual medical condition,
­natural ­language ­description, and technical but neces-
sary ­coding provide opportunity for malfeasance and
­error commission and omission through the AIS.
Keywords: health care expenditures, health care fraud,
third-party intermediary, third-party payer
Introduction and Overview
According to the North American Industry Classification
System (NAICS) Manual published in 2017 by the U.S.
­Office of Management and Budget (OMB), health care
and social assistance should be grouped together (namely,
sector 62) because of their commonalities and unclear
boundaries between them. See U.S. OMB 2017. Funda-
mentally, sector 62 circumscribes services (i.e.,  labor
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 Accounting Information Systems and the U.S. Health Care Industry
inputs) typically d ­ elivered by health practi-
tioners to individuals. Due to the ­nature of
health care delivered, ­financed, and charged
for in the United States, the AIS is first and
foremost used to identify the nature of these
health p ­ ractitioner l­abor i­nputs and quan-
tify their m­ onetary ­values for the p ­ urpose
of ­calculating costs, e ­xpenses, losses, and
revenues. Similarly, the AIS should a­ ccount
for the consumption of supplies and
cost  ­recovery of ­capital expenditures. The
­financial interests of the individual patients,
the health p ­ractitioners, and third-party
payers, such as f­or-profit ­(investor-owned)
insurance plans, nonprofit hospitals, and
public-sector assistance agencies and pro-
grams (e.g.,  Medicare, Tricare, Medicaid),
among others, demand accurate, complete,
and timely recognition, measurement, and
disclosure of these costs and expenses,
whether reimbursable or not reimbursable
to the given entity or individual. In brief,
there are two key financial interests invok-
ing the utility and robustness of the entity’s
AIS: value of profit or surplus and obligation
or right of reimbursement. These financial
interests are defined and controlled through
effective coding, predefined and discretion-
ary, facilitated by the AIS.
The U.S. health care system is both mar-
ket based and government subsidized at the
individual and practitioner levels or units
of analysis. Intermediation by third-party
­administrators in the private and public sec-
tors such as health insurance plans e ­ xerts
a significant influence over these units of
analysis; that is, often, individuals seek to
cover health insurance costs through these
third parties, and practitioners seek to sup-
port their revenues through payments by
these third parties. According to the U.S.
Centers for Medicare and M ­ edicaid S­ ervices
(CMS), national health expenditures in the
United States for 2016 were $10,348 per indi-
vidual, ­accounting for 17.9 p ­ ercent of gross
domestic product (GDP). See U.S. CMS
NHE 2016. The U.S. health care i­ndustry is
both large from the accounting, financial,
and economic perspectives and significant
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from the mortality, morbidity, and quality
of life perspectives. Without denigrating
the importance of the latter perspectives,
this article is more directly and immedi-
ately focused on the former perspectives,
which more or less incorporate the latter
perspectives through ­assessment of health
care treatment outcomes that bear on prac-
titioner payments authorized by third-party
payers and administrators; that is, health
care payments may be founded in part on
the effectiveness of the health care services
for the benefit of the individual ­ patient.
Thereby, quality of care may impact prac-
titioner revenue and cash collections.
Accounting for this naturally complex
and artificially complicated system requires
a robust AIS that maintains interoperability
with third-party payer and administrators’
requirements. Standardization and unifor-
mity are essential attributes for the AIS to
serve as an effective means of preparing
and supporting practitioner and individu-
als’ claims. This article focuses on practitio-
ner requirements in relation to third-party
payers and administrators as few patients
have the wherewithal, including time,
money, and incentives, to commit to the
purchase or development of their own cus-
tomized AIS. Without an effective AIS the
practitioner is likely fated to deficiencies in
cash collections, including a lack of timely
payments by third parties.
While accuracy, completeness, and time-
liness are essential attributes of an AIS,
especially with respect to the p ­ reparation
of invoices, claims, and other statements
supporting the provision and valuation of
health care services, fraud and abuse have
not been eradicated as significant risks in the
U.S. health care industry, notwithstanding
enhanced and powerful AISs. A ­ ccording to
the U.S. Department of Health and H ­ uman
Services Health Care Fraud and Abuse
Control Annual Report for fiscal year 2017,
the U.S. government alone ­negotiated or
won over $2.4 billion in health care fraud
settlements and judgments during fiscal
year 2017 (see U.S. HHS 2017); this figure
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 Accounting Information Systems and the U.S. Health Care Industry
excludes state settlements and judgments
implicating, among other legal causes of
actions, litigation arising from defrauding
state Medicaid programs.
Fraud as an intentional misrepresenta-
tion of health care services offered and
their proper valuation is only one concern
of managerial inspection and oversight of
the AIS: Unintentional under- and overbill-
ing are also legitimate concerns. The accu-
racy and completeness of the expenditure,
cost recovery, and revenue processes are
also at issue. However, as the U.S. health
care industry is characterized by extensive
use of intermediation such as private health
care plans and government health care pro-
grams that come between the individual
patient and the health care practitioner
to administer and finance the delivery of
health care, there is significant opportunity
for fraud: The payer is removed from the
recipient of care and the provider of care.
This removal and distance facilitates decep-
tion; the patient cannot realistically check
the performance and billing of the practitio-
ner, and he or she does not have the incen-
tive to do so beyond certain thresholds such
as deductibles.
The opportunity structure of the U.S.
health care industry readily allows fraud
­notwithstanding the most robust and e ­ fficient
of AISs, which is not to suggest that the AIS
is anything but the linchpin of the health
care system from the ­financial ­perspective.
See Table 1. As usual, the ­actions of corrupt
management o ­ verride and ­unethical or ­illicit
discretionary ­
­ conduct at other l­evels may
cause the AIS to prepare and ­issue ­materially
misleading claims, ­invoices, statements, and
reports.
Table 1: Opportunity Structure of U.S. Health Care Industry
Domain Inputs (e.g., labor)
Patient Uninformed
Practitioner Initiation hazard
Intermediary Authorization hazard
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There are problems within each domain
that facilitate the occurrence, filing, and
concealment of fraudulent acts and false
reports, including the following:
■■ Patients are especially vulnerable, usually
lacking expertise over the medical diagnoses
and prognoses and effectiveness of treat-
ment protocols and ­procedures. ­Patients
are largely uninformed about their con-
dition, how to treat it, what drugs, if any,
should be prescribed, and so on; that is,
the asymmetry of information between the
patient and the practitioner and interme-
diary is practicably unreconcilable. While
some patients may become somewhat
informed through research, the medical
jargon and billing codes are ­exceedingly
complex and complicated. The distinc-
tions between natural complexity evident
in diseases such as cancer and artificial
complications evident in design science
structures such as billing codes for medical
procedures and treatments are important
to consider: Complexity may be irreducible
in many respects; complicated designs are
by-products of an inefficient system that
may be mitigated through i­ ntelligent trans-
formation. Patients may be predisposed to
accept expert practitioner or authoritative
administrator opinions (e.g., they may fail
to challenge denials of claims).
■■ Practitioners are generally more expert
in their chosen field (e.g., oncology) than
in the discipline of database ­management
or design science (e.g., medical billing
software). Compliance with AIS cod-
ing ­requirements may be outsourced or
managed within the practice, though the
­practitioner would ­ordinarily be r­ esponsible
Process (e.g., AIS) Output (e.g., billings)
Alienated Intimidated
Technical preparation Over-reach hazard
Technical edits Under-reach hazard
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