The Federal Court has found against the ACCC in considering changes to Medibank’s coverage for certain out-of-pocket expenses and related representations made in various Medibank documents. In rejecting the ACCC’s contentions, the Court undertook a detailed and careful analysis of Medibank’s materials. While the Court rejected an artificial reading of materials, the case highlights the compliance risk for companies where documents, or portions thereof, may be read out of context. Also, and again while the ACCC was not successful, the proceedings highlight the willingness of the ACCC to allege that conduct is unconscionable. This is an area where the law is still developing and we would expect that the ACCC will continue to test the boundaries of whether a claim for unconscionability may be made good despite the Court’s rejection of the ACCC’s allegation in this instance.
The ACCC's Claims
Termination of MPPAs
In Australia, private hospitals do not employ or engage the medical practitioners who practise at the hospital, and patients form separate contracts with the private hospital (for ‘hotel’ services, nursing etc) and with each medical practitioner who treats them during their hospital stay (ie. separately with the surgeon, anaesthetist, pathologist, radiologist etc.). Most pathology and diagnostic imaging is provided by large corporatised healthcare companies (eg. Sonic, Primary, I-MED). Unlike other medical specialties, it is commercially possible for private health insurers to enter into ‘national’ agreements with the corporatised pathology and diagnostic imaging providers. In terms of private health insurance legislation though, pathology and diagnostic imaging are no different than other medical specialties: the legislation sets a minimum benefit which the insurer must pay and the decision to pay a higher benefit will depend upon the arrangements between the provider and the insurer from time to time.
From 2010 to late 2013, Medibank met the out-of-pocket expenses incurred by some of its policyholders for in-hospital pathology and diagnostic imaging pursuant to “Medical Purchaser Provider Agreements” (MPPAs). However, following a review of the economic feasibility of its MPPA arrangements, Medibank decided to terminate most (but not all) of its MPPAs in order to constrain costs growth and premium increases. As a result of this decision, Medibank policyholders begun to incur gap payments for these services as out-of-pocket expenses (that is, the difference between the legislated minimum benefit and the actual fees charged by the pathology or diagnostic imaging provider).
The alleged contraventions of the ACL
The ACCC commenced proceedings against Medibank in the Federal Court of Australia in June 2016. The ACCC alleged that, through print and online advertising materials, information provided by call-centre staff, welcome packs, members guides and policy documents, Medibank had represented that under the terms of its private health insurance policies, members would not incur any out-of-pocket expenses for in-hospital diagnostic services and that policyholders would be informed of any “detrimental changes” to their benefits under their policies. Along with Medibank’s failure to inform policyholders of its decision to terminate the MPPAs, the ACCC submitted that Medibank had:
- engaged in misleading or deceptive conduct (in contravention of section 18 of the ACL);
- made a false or misleading representation with respect to its private health insurance policies (in contravention of subsections 29(1)(g) and (m) of the ACL); and
- engaged in conduct which was liable to mislead the public as to the nature, quality, characteristics or suitability of its policies (in contravention of section 34 of the ACL).
In addition, the failure to inform members of its decision to terminate the MPPAs was said to amount to “unconscionable conduct” (in contravention of section 21 of the ACL), as Medibank had knowingly exploited its customers’ lack of understanding of private health insurance by not informing policyholders of changes which it anticipated would lead to consumers switching insurers.
Medibank’s defence was primarily factual. It’s position was that Medibank had warned consumers about the possibility that they may incur out-of-pocket expenses for in-hospital medical expenses both before and after the termination of the MPPAs and had expressly disclosed that its products, including “GapCover”, did not apply to in-hospital diagnostic services.
Medibank also argued that failure to make out the misleading and deceptive conduct claims would necessarily require a finding that its conduct was not unconscionable, as “there was no need to provide members with notice of its decision with respect to MPPAs, judged by what is right, reasonable and in good conscience”.1 Irrespective, Medibank contended that the evidence demonstrated that its decision not to notify customers of its termination of the MPPAs was motivated by its belief that out-of-pocket costs would either not be charged or would be charged at acceptable levels and that only a small proportion of policyholders would incur any such expenses. In essence, it was Medibank’s contention that “unpopular decisions are not thereby unconscionable”.2
The Court’s findings
Misleading and deceptive conduct and false or misleading representations
The ACCC’s case was premised on inferences which could be drawn from Medibank’s marketing and informational materials, rather than any evidence of actual dealings between Medibank and its customers.3
Following a detailed consideration of eight categories of materials by which the representations were alleged to have been made, O’Callaghan J concluded that the “cover” offered by Medibank would not reasonably be understood to mean complete indemnification for costs incurred by policyholders for medical treatment. In the context in which the term was used – describing medical procedures to which the policy responds – his Honour considered that an obvious distinction existed between the types of risks covered by the insurance and the benefits payable with respect to services rendered.4 As such, it could not be said that the representation alleged by the ACCC had ever been made to policyholders. In addition, the Court rejected the assertion that a reasonable consumer would conclude that pathologists and radiologists were not medical practitioners and therefore would provide services for which policyholders would not incur out-of-pocket expenses. O’Callaghan J considered that, beyond an “impression” conveyed by some of the relevant materials, there was no reason why anyone would read those materials and infer that pathologists and radiologists belonged to a separate class of medical practitioner.5
Moreover, although the ACCC had alleged that the effect of Medibank’s point-of-sale materials was to “entice [the consumer] into the marketing web”, thereby displacing the remedial effect of any disclaimer or qualification in post-sale materials as it was “too little, too late”, such an approach was considered “artificial” and unsupported by the evidence. The evidence demonstrated that materials, such as product disclosure statements and policyholder welcome packs, were available to consumers in-store and online prior to a policy being purchased, and as such the ACCC’s argument “incorrectly assume[d] that members and prospective members would not read or receive any other information concerning Medibank’s products, other than the single statement on which the applicant relie[d]”.6
Finally, the contention that Medibank had represented that it would give policyholders notice of any detrimental changes to their policies was rejected by the Court. Contrary to the ACCC’s submissions, the evidence did not demonstrate that Medibank’s product documents inaccurately “equated” the Fund Rules – changes to which Medibank had undertaken to communicate to policyholders – to all benefits under the policies. As the termination of the MPPAs did not involve any change to the Fund Rules, the failure to communicate was not inconsistent with any representation made.
The Court’s consideration of the unconscionable conduct case was relatively limited. The Court accepted Medibank’s submissions that the unconscionability action relied upon the success of the ACCC’s misleading and deceptive conduct action. Absent any misrepresentation to policyholders about the MPPAs, good conscience could not necessitate notification of 3.8 million policyholders of the decision to terminate the agreements.
The Court did, however, consider the evidence as to Medibank’s knowledge as to the understanding held by policyholders of private health insurance policies and the reasons for the decision not to inform policyholders. In this context, two primary findings are notable.
First, by relying only upon market research known to Medibank as to what its customers understood about the private health insurance industry and Medibank’s products, without identifying particular consumers who had been misled by Medibank’s conduct, the ACCC was unable to elucidate the precise nature and basis of the misunderstanding held by consumers. As O’Callaghan J indicated at :
“there is no evidence about how the survey evidence was adduced in the first place, or the constituency of participants. It is difficult therefore accurately to assess the statements about what members did, or did not understand or know.”
Secondly, the Court also accepted the evidence of Medibank’s primary witness that Medibank’s decision not to inform policyholders was motivated by its belief that its communications with policyholders were sufficiently clear in disclosing the risk that policyholders may incur out-of-pocket expenses, that any increase in out-of-pocket expenses was unlikely to be material and the fact that no “across-the-board” decision had been made given that certain MPPAs remained on foot. In O’Callaghan J’s view at :
“…the evidence, which I unhesitatingly accept, demonstrates that the decision not to communicate with members (about which the applicant complains) was a decision made in the context of the exercise by the relevant committee of its business judgment. Some may agree with it, some may disagree with it, but, in my view, there was nothing remotely unconscionable about it.”
The Court’s decision emphasised, consistent with existing authority, that a consideration of alleged misleading and deceptive conduct and false or misleading representation requires a rigorous consideration of the evidence in its totality.
In terms of unconscionability, the evidence available disclosed a decision-making process and commercial rationale for Medibank’s termination of the MPPAs which in no way possessed the underhanded, opportunistic and profiteering character alleged by the ACCC, and as such there was no need for the Court to engage with the uncertainties which exist in defining the content and outer limits of the unconscionability doctrine.
Nonetheless, and while the Court ultimately rejected the ACCC’s contentions, the fact of the ACCC commencing and pursuing proceedings highlights a compliance risk for companies where certain documents or passages in documents can potentially be read out of context. It is not always realistic to expect that every document or passage be self-contained. However it is in the interest of companies to review marketing or disclosure material with the same critical eye that the regulator may employ.
The ACCC announced this action on 16 June 2016, approximately 2 weeks before the 2016 Federal election. The action attracted extensive media coverage (particularly since ‘privatisation of Medicare’ was an issue in the election campaign). The end of June is also the major member recruitment opportunity for private health insurers due to the 1 July cut-off for calculating lifetime health cover loading. The inclusion of the unconscionable conduct allegation, in particular, created a possible impression of devious and callous behaviour by Medibank. This impression was at large during a peak marketing period in a business where (as with all insurance businesses) trustworthiness is important. The case therefore also demonstrates the potential for negative media coverage to be generated by the ACCC’s allegations, even where (as here) those allegations are not ultimately substantiated