Australia's biggest health insurer has been accused of concealing policy changes - which left patients with large, unexpected bills - as part of its attempt to boost profits ahead of its privatisation.

The Australian Competition and Consumer Commission has hauled Medibank before the Federal Court, saying it engaged in misleading and unconscionable conduct by failing to notify policyholders it had slashed coverage of common hospital tests such as X-rays, CT scans and blood tests.

On average, affected members were hit with an out-of-pocket expense of $151 for pathology and $83 for radiology, court filings show. Fairfax Media is aware of one patient left with a shock $1500 bill.

The watchdog alleges Medibank kept quiet about the policy change, made in September 2014, to prevent a customer exodus and boost profits ahead of a $5.7 billion public float, which occurred two months later.

Finance Minister Mathias Cormann, who spearheaded the sale, said he wasn't aware of the alleged misconduct and pointed out the ACCC was consulted as part of the due diligence process.

"These allegations ... were never raised during that process," he told Fairfax Media.

"The commonwealth was the vendor and received all of the proceeds from the IPO on behalf of taxpayers. Medibank, including its board and management, were not the beneficiary of any of the IPO proceeds."

Labor said if the allegations are proven true, it showed privatisation did not benefit the health system or policyholders.

"[It's a] stark reminder of the danger to patients if the Turnbull Government is re-elected and continues to press ahead with its plans to privatise Medicare, putting profits before patients," said Opposition health spokeswoman Catherine King.

"Given Mr Cormann was the responsible minister for the 100 per cent shareholder, it strains credulity he now argues he had no knowledge of this incident," Ms King's spokesman added.

Health Minister Sussan Ley refused to comment on the court proceedings, but said the legal action highlighted the need for transparency in the health insurance sector.

"That's why Bill Shorten and Labor's flippant dismissal of the Coalition's plan to shine a light on fine print and introduce standard levels of cover is an insult to the 12 million Australians with private health insurance."

The ACCC alleges Medibank also calculated it stood to make big profits because it wouldn't have to pay gaps or the future medical claims of members who left because of the change but were likely to make claims frequently.

"The [initial public offering] was a very relevant background factor, so one can draw inferences. Certainly it makes logical sense this is the time when you're trying to maximise your earnings," said ACCC's chairman Rod Sims.

Medibank rejects claims

A Medibank spokesman said the health fund, which has 3.9 million members through its Medibank flagship and subsidiary ahm brands, refuted the ACCC's claims.

Its share price tumbled nearly 5.5 per cent on the stock exchange, while the broader market was steady.

"Medibank takes its obligations under the Australian Consumer Law seriously, and has appropriate processes in place to ensure compliance. We have been working co-operatively with the ACCC throughout its investigation," the spokesman said.

The ACCC said the alleged misconduct impacted most hospital policies in place since January 2012.

Since that time, Medibank had agreements with in-hospital pathology and radiology providers, where it would cover the gap on behalf of members if the providers charged above the Medicare Benefit Schedule fee.

Court documents show in September 2014, Medibank terminated or phased out the agreements. As a result, policyholders were no longer completely covered, and had to pay the gap as an out-of-pocket expense.

"Medibank has made no changes in response and the conduct is continuing," said Mr Sims. "We believe there were many people affected and urge them to complain to Medibank in the short-term."

Show me the money

The ACCC wants Medibank to reimburse affected members for any out-of-pocket expenses since September 2014.

It alleges Medibank only forked out "ad hoc payments" when members, outraged by the change, complained.

Medibank policyholder Phyllis Dixon told Fairfax Media last year she was shocked with a $1500 bill from a diagnostic imaging company shortly after she was discharged from a private hospital in Melbourne.

Her daughter Gail Robins-Browne said: "My mother has on file many letters from Medibank Private informing her of other changes to premiums and the cover provided, but they seem to feel that it was not necessary to inform their clients of this very significant change."

At the time the Private Health Insurance Ombudsman said about 30 people had complained about the same issue and that all complaints had been resolved by Medibank without requiring further investigation by the ombudsman.

Consumer confusion

The ACCC alleges Medibank exploited consumer confusion in regards to the health insurance system.

As a signatory of the Private Health Insurance Code of Conduct, Medibank should have given its members advanced notice of "detrimental changes". It also did not update it marketing and product summary materials.

It said Medibank knew or expected that many members incorrectly assumed their in-hospital medical expenses were covered, and that most members didn't make enquiries about out-of-pocket expenses before being admitted to hospital.

"[Consumers] have significantly lower bargaining power ... poor familiarity with private health insurance policy terms ... relied on Medibank to inform them about their entitlements to benefits and about potential out-of-pocket expenses," the court filings show.

It said Medibank ought to have known the biggest impact would be on a "vulnerable class of consumers", because they were likely to have been previously hospitalised and/or had chronic conditions requiring frequent admissions to hospital. 

It alleges the health fund adopted a strategy of keeping communications about this change "contained and reactive".

The Consumer Health Forum said the court action highlighted the need for reforms to make health insurance simpler, transparent and more certain for consumers.

"We need to provide an effective incentive for funds to provide genuine, consumer-friendly policy documents that people can understand and rely on," said the forum's chief executive Leanne Wells.

The legal action comes just months after Medibank reported a surge in profit for the first half of 2015-16 of $271.7 million, up nearly 60 per cent in one year.

The ACCC is seeking declarations, injunctions, compensation orders, pecuniary penalties, findings of fact, implementation of a trade practices compliance program, corrective notices and costs.

with Julia Medew and Peter Martin

Do you know more? ehan@smh.com.au