WHO SHOULD decide what sorts and amounts of medical treatment should be reimbursed by publicly funded medical programs? In this country that decision is left, by and large, to the doctors and hospitals that provide the care. Sometimes--perhaps often--this results in public money's being spent in ways that many people think are unwise or, at least, inefficient.

We're not talking about the obvious cases of fraud--the doctor who bills Medicare $130,000 for patients he never saw or the nursing home operator who includes his Florida vacation expenses. While cases like these aren't as easy to detect as you might imagine, at least you know what to do about them.

More difficult--and more prevalent--however, are the borderline cases in which the issue is whether the medical care provided is needed, effective and reasonably priced. Take, for example, a case reported in this newspaper involving a doctor who received $623,000 in Medicaid payments over the last three years, most of it for injecting overweight patients with an appetite suppressant. D.C. officials are now questioning whether the doctor's billings are excessive and whether his treatments are effective. The doctor responds that obesity is a well-recognized medical problem and that if his treatment weren't effective, patients wouldn't come to him.

The matter, of course, isn't settled that easily. If the doctor's patients had to pay for their $20 injections out of their own pockets, they might decide simply to go on a diet or seek cheaper forms of help. This is just one example of the numerous instances in which medical insurance--whether private or government-supported--can encourage medical diagnoses and treatments for which the expense probably exceeds the likely benefit.

Private insurance tries to curb inefficient medical care by making patients pay some fraction of the cost. That may help--at least to the extent that patients understand their options clearly--but you can't go very far in this direction when you're dealing with people with limited incomes or serious ailments without discouraging them from getting help altogether.

In retrospect, it seems likely that the nation might have bought more basic health care if it had put more federal money into increasing and monitoring the supply of medical services--particularly in underserved urban ghettos and rural areas--and less into stimulating demand. That approach, however, would have come into sharp conflict with the traditional emphasis on the patient's right to select his own doctor and the doctor's right to set the price for his service. That conflict isn't easy to resolve, but the costs of ignoring it are rising steadily.