Medibank is facing legal action in the Federal Court over “misleading and unconscionable conduct”.

The Australian Competition and Consumer Commission (ACCC) has launched proceedings against the private health insurance provider after it failed to give proper notice to members on a key decision.

The competition watchdog says Medibank intentionally covered up its moves because it knew going public would make some members leave.

The allegations relate to Medibank’s decision to limit the benefits it would pay for in-hospital pathology and radiology services, including blood tests, x-rays, CT scans and MRI scans.

Medibank’s 3.9 million members make it Australia's largest private health insurer.

Medibank made agreements with pathology and radiology providers to pay the difference if those providers were charged above the Medicare Benefits schedule fee.

But Medibank appears to have terminated or phased out those agreements in 2014, before members were completely covered.

“Consumers are entitled to expect that they will be informed in advance of important changes to their private health insurance cover, as these changes can have significant financial consequences at a time when consumers may be vulnerable,” ACCC chairman Rod Sims said in a statement.

The ACCC also alleges that Medibank calculated the risk of disclosing the change, and decided that it might prompt members tp leave the insurer.

The watchdog claims Medibank kept its decision quiet to protect its reputation and preserve the value of its IPO.

The ACCC will argue that Medibank knew the change would lead to large financial gains.

Medibank has responded to the announcement of the court proceedings, saying it is “committed to acting in the best interests of our members and refutes claims by the ACCC”.

“We have been working cooperatively with the ACCC throughout its investigation,” the statement said.

The company says it had processes in place to ensure compliance, and encourages members to make contact if they have concerns.