The Australian Competition and Consumer Commission (ACCC) launched the court action on Tuesday, claiming that the health insurer made "false representations" about entitlements to members holding ahm 'lite' or 'boost' policies.

The ACCC alleges that these members were told they were not entitled to cover for joint investigations or reconstruction procedures, when their policies did in fact cover these procedures.

"We will allege that Medibank incorrectly rejected claims or eligibility enquiries from over 800 members for benefits that they were entitled to and were paying for," ACCC Chair Rod Sims said.

"As part of our case, we estimate about 60 members needlessly upgraded their policies so they could access the joint investigation and reconstruction procedures they were already entitled to under their existing, cheaper insurance policies.

"In some cases, it is alleged that members who upgraded their policies were also required to serve a further waiting period to access these procedures."

Mr Sims said Medibank's alleged misrepresentations had serious consequences for members requiring procedures including spinal surgery, pelvic surgery, hip surgery and knee reconstructions.

"Some members were forced to delay surgery due to high out-of-pocket costs for these procedures and to seek alternative remedies to manage pain, when they were in fact entitled to insurance cover," he said.

The ACCC's proceedings against Medibank involve alleged misrepresentations in relation to lite policies from February 2013 to July 2018; and boost policies from February 2017 to July 2018.

In a statement Medibank said customer complaints led to an internal investigation of the issue in 2017, when 'an internal process failure' was discovered.

Medibank voluntarily notified the ACCC of the issue in 2018.

Meantime ahm contacted around 130,000 customers in 2018 who were insured by ahm boost and lite products, to ensure that anyone affected by the error was compensated.

Since then ahm has paid compensation to around 175 customers, totalling around $745,691.

"We apologise unreservedly to our customers who have been impacted by the error," ahm senior executive Jan O'Keefe said.

"We have already notified all customers who are or were insured by the ahm boost and lite products since inception of the products. We did that to ensure that any customers affected by this error were compensated.

"In conducting the investigation, we also reviewed ahm's process for developing and managing products, to help ensure that this does not happen again."

ahm was founded in Wollongong in 1971; it was acquired by Medibank in 2009. Its headquarters remain in Wollongong's CBD, with around 200 employees.

ahm customers who held boost or lite products between 2013 and 2018, can contact the insurer with any inquiries on 1300 721 581.