Medibank Private Ltd share price hammered on legal action

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.

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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.

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