Why Medibank Private Ltd’s reputation is on the line

Shares of Medibank Private Ltd (ASX: MPL) enjoyed a remarkable start to the year. From $2.15 at the beginning of 2016, the shares soared as much as 54.4% to a high of $3.32 early last month.

In the time since, however, it’s been all downhill for Medibank’s shareholders. The shares closed at $2.98 on Monday – 10.2% below their peak – but did trade as low as $2.82 late last week following a sharp selloff.

The selloff came after an announcement by the Australian Competition and Consumer Commission, commonly known as the ACCC, regarding an investigation into some of its activities stemming back to 2014 – before the company’s hotly anticipated initial public offer (on the ASX) which reaped the government $5.7 billion.

According to the ACCC’s website, the competition and consumer watchdog is taking Medibank Private to the Federal Court, alleging that the private health insurer, as well as its discount brand ahm, had misled consumers by failing to disclose changes and limits to in-hospital pathology and radiology benefits.

It is alleged that by not disclosing to clients certain changes that had been made to their policies, Medibank would make substantial financial gains, including from not paying gaps, and from not paying the medical claims of those members who left Medibank after becoming aware of the changes.

What’s more, Medibank was allegedly concerned that, had it told clients about the changes, many would leave the company in search of superior coverage. Not only would this have made Medibank less competitive against the likes of Bupa, HCF and NIB Holdings Limited (ASX: NHF) at a time where competition across the sector is heating up, it would have also been damaging for the company’s reputation ahead of its November 2014 IPO.

It seems that instead of damaging its reputation prior to the IPO, that effect may merely have been delayed. Medibank’s policies are already regarded as being somewhat more expensive than those offered by rivals and if it is determined that Medibank did indeed act in unconscionable ways and that it did mislead consumers, that could be enough to turn more people away from the company’s products.

The alleged conduct also doesn’t work wonders for the health insurance industry as a whole. Not only could it raise doubts about the integrity of companies across the sector, it could also force some consumers to steer clear of private health insurance altogether. After all, health insurance premiums are rising strongly each year – well ahead of the rate of inflation – with some preferring to simply rely on the public health sector.

Medibank did respond to the ACCC’s proceedings, saying that it is “committed to acting in the best interests of our members and refutes claims by the ACCC… Medibank takes its obligations under the Australian Consumer Law seriously, and has appropriate processes in place to ensure compliance.

Of course, nothing has been proven at this stage so it wouldn’t be fair to make assumptions just yet. If it is proven, however, it could prove particularly damaging to Medibank’s reputation, which could then hurt its bottom line and hence, its share price.

This isn’t necessarily a reason for investors to sell – at least not at this point – but it is something prospective investors should keep in mind.

Why retirees LOVE these 5 ASX stocks

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.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

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 Financial Services Guide (FSG) for more information.