Shares of Medibank Private Ltd (ASX: MPL) have been sold down heavily today following allegations from the competition watchdog that the health insurer has mislead patients and engaged in unconscionable conduct.

After closing at $3.08 on Wednesday, the shares fell to a low of just $2.86, but have since rebounded to $2.90 at the time of writing. That represents a decline of 5.8%, although the shares are still trading well and truly in the black since the beginning of the year.

The allegations come from the Australian Competition and Consumer Commission (ACCC) which said on its website that it would take the private health insurance business to the Federal Court. It alleges that Medibank, as well as its discount brand ahm, contravened Australian Consumer Law by misleading consumers by failing to disclose changes and limits to in-hospital pathology and radiology benefits.

It was also alleged that Medibank calculated a risk that if it were to disclose such changes, that members may leave Medibank in search of other cover. What’s more it also alleges that by not disclosing the changes, Medibank could also reap “substantial financial gains” which may have been somewhat priced into the company’s share price.

The ACCC said that: “Medibank did not provide members with any advance notice of the change despite previously representing that it would do so. Medibank also adopted a strategy of keeping communications about this change contained and reactive. The ACCC alleges that Medibank’s conduct was misleading and, in all the circumstances, unconscionable.”

Thus far, Medibank is yet to issue an official response to the ASX regarding the ACCC’s allegations. However, The Australian did report that Medibank was working cooperatively with the ACCC and that it would defend itself against the ACCC’s claims in court.

The ACCC said it was seeking declarations, injunctions, compensation orders, findings of fact, corrective notices and costs as well as pecuniary penalties. However, the biggest damage could potentially be inflicted on Medibank’s reputation which would be bad news for the group, particularly at a time where the private health insurance industry is growing increasingly competitive.

Bupa and HCF are two top competitors while fellow ASX-listed NIB Holdings Limited (ASX: NHF) also upgraded its earnings guidance in April this year. Medibank’s shares have been on a roll so far in 2016, but that could change if these allegations prove to be true.

Why retirees LOVE these 5 ASX stocks

The market is volatile right now, particularly in the lead-up to Britain's vote to either stay or leave the European Union. Some of the better shares to hold during times of such uncertainty are those which pay decent dividend yields -- not only because they offer a steady stream of income, but also because those businesses which can afford to pay dividends are typically considered more stable than those which do not.

Discover The Motley Fool's top 5 ASX dividend stock ideas for 2016 to get you started building a more diversified income portfolio that is paying you back! Click here to learn more.

The report is free! No credit card required.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.