The Medicare program will overpay up to $1.5 billion next year because insufficient funds are being provided to audit doctor and hospital bills and monitor service patterns, congressional witnesses testified yesterday.

Reducing funding for auditing activities to save on administrative costs is "penny-wise and pound-foolish," the General Accounting Office's Janet L. Shikles told the House Ways and Means Subcommittee on health. She said every dollar spent to make sure payments are proper saves Medicare about $11.

The overcharges are not only those that result from mistakes in billing but also those that come from paying for services Medicare does not cover, improperly classifying services in a category that calls for higher payments or providing treatments that are not medically necessary.

Subcommittee Chairman Fortney H. "Pete" Stark (D-Calif.) said he feared "that for every $600 toilet seat the Pentagon bought, Medicare has bought a $600 bedpan."

Stark blamed the cuts on the Reagan administration's conviction that "the government was 'too big' and 'too intrusive.' " Rep. Willis D. Gradison Jr. (R-Ohio) countered that Congress ultimately controls the appropriations and "I'm just not convinced the problem is not spending enough money."

Shikles said insurance companies such as Blue Cross-Blue Shield, which act as the government's intermediaries in Medicare payment claims, receive special administrative funds to audit cost reports to make sure ineligible or inflated amounts aren't submitted and to review services provided.

These companies also are supposed to make sure Medicare does not pay bills that should be paid by private insurers. Shikles said Medicare may pay as much as $200 million a year that is the responsibility of private insurers.

Shikles said that while Medicare's claims have been increasing about 10 percent a year, the amount paid agent organizations to administer the program and monitor payments has dropped from $3.53 per claim in 1984 to $2.74 in 1989 -- in real, after-inflation dollars.

The goverment spent $358 million in 1989 to audit Medicare, she said. That spending was cut to $332 million this year and the request for fiscal 1991, which begins Oct. 1, is $335 million, she said.

She said that nationwide "only a small percentage of Medicare cost reports, generally those of the largest hospitals, are audited before final settlement. As a result, billions of dollars in costs claimed by smaller providers -- small hospitals, skilled nursing facilities, and home health agencies -- are never audited."

William R. Horton, speaking for Blue Cross-Blue Shield, said that if payment safeguard funds had been increased at a moderate rate over recent years, "Medicare could be saving $5.3 billion in fiscal 1991" on improper payments, but with the lower budget, "the administration is projecting saving only $3.75 billion, a loss to the program of over $1.5 billion."

Michael Mangano, deputy inspector general of the Department of Health and Human Services, said Medicare paid $3.5 billion for more than 1 million cataract operations in 1988, but his office found 1.7 percent of the patients did not need the operation, another 1.7 percent received poor-quality care and 14.6 percent received questionable care.

The Inspector General's office sampled 84 of the 257 ophthalmologists and ophthalmology groups that "received more than $1 million from Medicare in 1987." It found that these high-volume providers were twice as likely as others to give poor-quality surgery and to fail to meet minimum clinical standards to show the procedure was necessary.

He said another study of exploratory examinations of both the upper and lower gastrointestinal tracts found that 23 percent of endoscopies and 8 percent of colonoscopies were unnecessary.