How Warren Buffett might view Medibank Private Ltd shares

Investors in Medibank Private Ltd (ASX: MPL) are still onto a pretty good thing, up 40% in the past 12 months despite the recent announcement of an Australian Competition and Consumer Commission (ACCC) investigation into the company.

As readers may know, the ACCC has accused Medibank of hiding changes to radiology and pathology rebates in order to boost profits before the company listed on the ASX in 2014. Fairfax media reported that the ACCC’s court filings show average out of pocket expenses of $151 for pathology and $83 for radiology.

Although any fines and restitution charges are not expected to be material to the business, analysts have claimed that the reputational damage could be significant. The prime reason for selling health insurance is ‘peace of mind’ – knowing that most of your health bills will be covered when you need them to be. Hidden changes to policies – a claim Medibank disputes – must undermine this peace of mind and a Warren Buffett quote springs to mind:

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

Given Medibank’s recent focus on cutting costs and reducing claim expenses, cynical investors might wonder if similar allegations will emerge in the future.

The bottom line

Australians have proven incredibly tolerant of scandals and misdemeanours at our major banks, who retain their business despite ample evidence that savings of thousands of dollars can be found just by switching provider.

However, health insurance is a different story and I can’t remember the last time I didn’t hear someone complain about the cost of premiums or their cover. For the moment this issue looks to be a storm in a teacup, but Medibank and its low-cost brand ahm continue to have problems retaining members and an ACCC investigation is certainly the last thing the company or its brand need.

As I’ve written before, I think Medibank is a great business with some tailwinds, although it faces several challenges, is pricey, and I continue to believe shares are a ‘Hold’ today.

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Motley Fool contributor Sean O'Neill 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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