DETROIT (AP) _ Punitive damages in medical malpractice lawsuits should not be eliminated because they are a deterrent to ''incompetent'' health care, the head of the American Bar Association says.

ABA President John Shepherd, in Detroit this weekend for the organization's 1985 midyear meeting, acknowledged that the costs of medical malpractice insurance remain a problem, but said the cure is not in ''ill-considered, peremptory actions.''

Shepherd was reacting to the American Medical Association's call for an immediate limit on the size of financial damage awards in medical malpractice suits.

The AMA's board of directors last week also called for limiting ''non- economic'' damages - such as those awarded for pain or mental anguish - which it called ''a primary cause of the grossly distorted awards'' in liability cases.

But quoting from a bar association task force's findings on the nation's liability system, Shepherd said Friday that punitive damages provide a ''significant and necessary deterrent against incompetent and careless rendition of medical services.''

The task force found no evidence that alternative approaches would be better either as a matter of economics or justice in dealing with medical malpractice cases, he said.

''I doubt that any American, including health care providers and their families, would be willing to give up their rights,'' Shepherd said. ''Would they be willing to accept a fixed amount for the loss of a limb or an eye? Or even, in the worst of circumstances, the death of a loved one? Should a victim's pain and suffering not be taken into account? Would they agree with the proposition that punitive damages do not have a significant deterrent effect?''