(MONEY Magazine) – When 54-year-old Marina Saenz of New York City was left comatose after routine gall bladder surgery eight years ago, her son filed a malpractice suit. And when he collected $3 million in an out-of-court settlement in 1986 -- including $1 million from the surgeon, Dr. Eugene Quash -- he assumed his legal battles were over. Wrong. Since no legal judgment of liability had been passed, the following year Quash sued Saenz's son for unpaid medical fees of $115,350. Some $4,000 of that was for the original operation. The rest covered post-operative ''examinations and evaluations'' -- including a claimed 931 visits to the comatose patient's bedside. (She died last year without ever regaining her senses.) ''I feel sorrow and compassion for the family,'' Dr. Quash said in an affidavit accompanying the lawsuit. But, he said, ''I am merely seeking the fair and reasonable cost of my services.'' Understand from the beginning that this story is not about Quash, his skill as a surgeon or the details of this sad case now dragging through the courts. Instead, it's about what doctors charge. Though Quash's fees might be called ''fair and reasonable'' compared with those of other surgeons in his area, the fact that he felt free to bill at all under the circumstances may seem shocking. Quash may be extreme, but his sense of entitlement is not unusual for a doctor. Even for a doctor who has not just paid a large sum to settle a malpractice suit. A good, competent, well-meaning doctor, for example. Your doctor. This story is no academic exercise on the love of money, however, but an effort to find out what ails the nation's bloated $650 billion health-care system and how to keep it from pricing itself out of the reach of all but the rich. Having competent, affordable health care, as a recent MONEYH poll suggests (see the story on page 18), is essential to achieving the American dream. Evidence indicates that those who are health care's prime deliverers are also among the greatest threats to its affordability. Jarringly, the doctors who designed and control this near-bankrupt system are up to their stethoscopes in positive cash flow. According to a 1990 study by the National Bureau for Economic Research in Cambridge, Mass., doctors' wages have been the fastest-rising component in health-care costs over the past decade. Between 1982 and 1988, the government struggled to contain the rocketing cost of its Medicare program by capping fees; the average number of visits to physicians' offices declined by 6%; and hospital consultations plunged by 23%. Yet, astonishingly, despite fewer patients and limited fees, doctors' incomes rose 48% during those six years -- twice the rate of inflation. Today, physicians' incomes average $150,000 a year, surgeons' and anesthesiologists' $200,000, and cardiovascular surgeons' nearly $400,000. In some big cities, the figures are much higher. Physicians' fees in the U.S. are fully 139% higher than next door in Canada. More disturbing than the lofty level of doctors' incomes, however, are some of the ways that those incomes may be earned. Consider these findings by insurers, government investigators and health policy analysts: -- Up to a third of medical treatments are unnecessary. Estimated excess cost: $50 billion annually. -- One in eight doctors owns a health-care business to which he refers patients. His patients get more tests than do patients in general. Estimated excess cost: $140 million annually. -- Up to 40% of surgical claims are misbilled by doctors, increasing their % fees. Estimated excess cost: $6 billion annually.

Doctors' fees are only about 20% of health-care spending. But by prescribing treatments, testing and drugs, usually but not always provided by others, they start a wave that grows as it passes through the system. Physicians control 80% of the costs of medical care, an average of $1 million per practitioner a year. So a doctor who pads his income can cause financial damages far in excess of his own profits. Of course, not all physicians cheat. But the number of problem practitioners goes far beyond the ''few bad apples'' that the profession has always acknowledged. Even doctors now admit the issue is larger. In January, the Journal of the American Medical Association ran a first-ever editorial on the subject of doctors' appetite for money. ''Greed is in fashion,'' wrote editor George D. Lundberg. ''Physicians aren't immune.'' Adds Portland, Ore. psychiatrist Ralph Crawshaw: ''Doctors laugh about greed. We shouldn't. It's a sickness that impairs judgment, just like alcoholism or drug abuse.'' Rather than simply blaming doctors -- or even expecting them to clean their own houses -- health care reformers are turning their attention to weaknesses in the system that have allowed or encouraged avarice among physicians. New federal laws to curb profiteering, software to root out fraud and broad-based research to identify unnecessary medical treatment are aimed at changing the way that doctors practice and ultimately what they're paid. Not that no one has been trying to control costs. As employers' health insurance bills have risen from about $1,000 per worker in 1970 to $2,500 today, companies have increasingly turned to health maintenance organizations and preferred-provider networks, which offer doctors large patient groups in return for limits on the fees they charge those groups. Today about 50% of doctors earn some or all of their income from these sources. But even with such limits on fees, a doctor can usually make extra money by increasing treatment, as Medicare has found out. Since 1981, the number of Medicare beneficiaries has risen by 2% a year, yet the number of doctor services billed to the program has jumped 7% annually. If you ask most doctors to explain the surge, they'll mention three factors: fear of malpractice, which leads to ordering extra tests; high technology, which has added extra tools to the diagnostic arsenal; and lengthening life spans, which increase the likelihood and duration of medical debility. What they probably won't mention is that many tests and treatments are proving to be more than the patient needs. The evidence is getting positively embarrassing. In their 1982 landmark study of medical practice in six New England states, researchers John Wennberg of Dartmouth and Alan Gittelsohn of Johns Hopkins were among the first to demonstrate that the number of hysterectomies, prostatectomies and tonsillectomies done in an area correspond to the number of local surgeons, not the number of patients. At first, some surgeons argued that the study could also suggest that too little surgery is done where doctors are scarce. But so-called outcomes analyses suggest otherwise. First undertaken in the early 1970s, outcomes analyses track individual cases to determine if and when specific medical treatments justify their risks and drawbacks. Says Robert Brook, one of the designers of the original outcomes analyses project undertaken by the Rand Corp. in Santa Monica, Calif.: ''Almost every study that has seriously looked for overuse has discovered it, and virtually every time at least double-digit overuse has been found.'' Estimates on unnecessary hysterectomies run as high as 50%, inspiring a grim joke among researchers: ''What condition requires a woman to have her uterus removed? Health insurance.'' While not posing life-threatening risks, as surgery can sometimes do, medical testing can pack a powerful profit wallop for doctors. That's because physician ownership of medical service companies has become increasingly common. A report issued last year by the Department of Health and Human Services estimated that nationwide about 12% of doctors who bill Medicare own an interest in health-care businesses and about 25% of independent clinical labs -- those that analyze body fluids -- are doctor-owned. Patients referred to such labs by those doctors receive as much as 45% more services than Medicare patients in general, says the report, costing the program an estimated $28 million or more in 1987. It's against federal law for doctors to accept kickbacks for referring Medicare patients for medical services, but it's not illegal for doctors to invest in companies that provide those services and to refer their patients to their own facilities. Since it's difficult to track connections between labs that doctors own and patients that they refer to those labs, much less prove a financial arrangement that violates the law, prosecutions of doctors for kickbacks are rare. Last year, however, the Department of Health and Human Services brought a case against Huntington Beach, Calif. pathologist Melvin Huntsinger and four nonphysicians. Huntsinger's alleged offense: phoning certain Southern California specialists likely to have a high volume of referrals to clinical labs and offering them shares in a limited partnership opening three new labs in their areas. For investments of $1,500 to $5,000 -- depending on the volume of their referrals -- the partnership allegedly promised the doctors returns of at least 100% a year on their money. About 150 said yes. After more than a year's investigation, the government concluded that, since each doctor's return was linked to the number of his referrals, the partnership essentially was offering kickbacks, not investment returns. Last December, the agency notified Huntsinger that it plans to bar him from the Medicare program for seven years. He asked for a formal hearing, which occurred in August. The outcome is pending. Though the lab's corporate manager, SmithKline Beecham Clinical Laboratories, admitted no wrongdoing, it settled with the Department of Health and Human Services for $1.5 million. A decision on whether to take action against the investing doctors, including possible disbarment from Medicare, is expected early next year. Huntsinger, 49, who claims he made just $30,000 as a consultant for SmithKline and has already spent more than that on legal fees, is adamant that he did nothing wrong. ''Doctors have to get involved with labs. Big business can't assure quality care,'' he insists. It's not far from unnecessary tests to unwarranted charges. Since January, Arnold Widen, medical director for Blue Cross and Blue Shield of Illinois, has spent a few hours each month phoning doctors who consistently overbill the insurance company. ''Code unbundling is a big problem for us,'' admits Widen, referring to the technique of listing multiple insurance codes to overstate the actual amount of work done. Some experts estimate that the percentage of overbilled claims runs as high as 40%. As an example, Widen cites a gastrectomy, removal of the stomach, for which a surgeon might receive about $3,000. By separately billing for procedures that are part of the operation, such as opening the abdomen, a surgeon can double or triple his fee. While cures for such abuses have proved elusive until now, three major developments carry real hope of saving the health-care system by forcing strong medicine down doctors' throats.

Rx 1: Making greed illegal. Congress passed a law last year sponsored by Representative Pete Stark (D, Calif.) that will make it illegal, as of 1992, for doctors to invest in the same clinical labs to which they refer Medicare patients. Other Medicare-funded services, including diagnostic imaging centers, or referrals of non-Medicare patients, will be unaffected by the new law. The legislation also provides that all health-care businesses that bill Medicare must periodically report the names and Medicare identification numbers of all physician-owners. At the same time, bills for referred services must list the name and ID of the referring physician. This will help Medicare cross-check to determine how abusive physician ownership is. ''As the data accumulate, I'll be back with more legislation to weed out greedy bastards,'' vows Stark.

Rx 2: Recutting the payment pie. In 1992, Medicare will begin paying doctors according to a new Resource-Based Relative Value Scale (RBRVS), which takes cost of service heavily into account. Under the current system, fees have little or nothing to do with such intrinsic factors as the value of the doctor's training, his overhead and the intensity of work. This has led to gross imbalances in compensation for different medical skills and services. Surgeons' fees, for example, are so much higher than those of allergists or family practitioners, who spend more time with patients, that the difference cannot be explained simply by the surgeon's greater training and higher malpractice insurance costs. By adding up all the components of practice for each specialty, Harvard economist William Hsiao developed comparative cost data that will be used by Medicare to level the playing field. Since the new scale will reward diagnostic skills more and technical skills less, observers hope it will shift the tide back toward lower-tech, lower-cost treatment. The trend should also benefit patients, who are increasingly subjected to uncomfortable, sometime risky, tests and procedures that may yield few useful results.

Rx 3: Fingering the offenders. For years, fee and practice averages were about all insurers had to go on in trying to figure out what medical treatments were useful. Outcomes analyses such as Rand's, however, now provide hard data on how specific treatments affect the health of individual patients. Nearly 100 research groups -- including one funded by the federal government -- currently have such projects under way. Their goal: to develop clear guidelines for medical practice. Value Health Sciences, a two-year-old company in Santa Monica that uses data developed by Rand, already sells software that can consider in advance of a procedure the odds that it will be both effective and efficient. The software can assess the likely outcome of 34 different procedures, ranging from tonsillectomies to heart bypasses, taking into account such circumstances as the patient's age, medical history and whether there is a better way to treat the problem. The company's 25 clients, including seven Blue Cross and Blue Shield plans, eight commercial insurers and 10 HMOs, use it to uncover unwarranted treatment before it is performed. Suspect cases are referred to the plan's physician-reviewer, who discusses them with the treating physicians and then decides what will be covered. Company president Leslie Michelson estimates that the software has turned up overused procedures in 10% to 15% of the cases it has examined. ''We expect to sell software covering 60 procedures that represent about 40% of all spending within two or three years,'' adds Michelson. Software is also being used to track physician overbilling. Doctors are coming to realize that their future will be very different from their past. Straw in the wind: a recent survey by Merritt Hawkins & Associates, a Dallas physician-recruiting firm, found that 81% of 1989 medical school graduates said they preferred a guaranteed wage to solo practice. ''They're worried that they may never earn what older doctors have,'' says company president James Merritt. They're probably right. Current budget proposals call for cutting $16.5 billion more in Medicare payments to doctors over five years, including lowering of fees for 244 procedures, reduced payments for doctors in practice less than five years, and lower fees for surgeons who assist at operations. Fed up with failed efforts to control health-care costs, several companies have even begun to bring medical care in-house. Gillette and Goodyear, for example, have hired doctors to treat employees on premises. Salaries average between $80,000 and $125,000 annually, about the same as at HMOs. Will that be enough for doctors, particularly if it helps save U.S. health care from cost meltdown? Says Rene Lerer, an internist and national medical director of The Travelers: ''We've created a system that appeals to doctors' weaknesses, not their strengths. It's in everyone's best interests to put it right.''

BOX: Patients of the world: join the fight!

You're wrong if you think you are powerless to help reform our cockeyed health-care system. Even if your insurer pays the whole tab, starting right now you can: -- Talk money with your doctor. Ask what everything costs. Make it clear that you're interested not just in your out-of-pocket expenses but in total costs. -- Talk value. It is not just the amount of money that is spent; it's what you get for it. Ask how much a test or procedure will add to your doctor's knowledge about your condition, and how much such a treatment will benefit you. Then decide if it's worth not just your share but the full amount involved. -- Don't use price as a stand-in for quality. What a doctor charges or a diagnostic test costs isn't the slightest indication of how useful the service is. When your doctor suggests a specialist or a test, ask if there are less expensive alternatives of equal quality. -- Report fraud and abuse to your employer or insurer. They catch only a relatively small amount through their billing screens. Your tip may set up a review that flushes out a cheater who's slipping through the net. -- Don't be greedy yourself. Don't ask your doctor to mislabel a visit so you can be reimbursed for services that aren't covered by your insurer, such as annual physicals. If you want your doctor to play it straight, you should do so too.