The competition watchdog has been dealt a blow after the Federal Court threw out a landmark case against private health insurer Medibank over alleged misleading and deceptive conduct.

The Australian Competition and Consumer Commission took action against Medibank in June last year after the insurer stopped covering out-of-pocket expenses on some medical tests such as x-rays, CT scans and blood tests.

Medibank chief executive Craig Drummond said the company "firmly [believed] that our actions were not unlawful". Credit:Pat Scala

It alleged Medibank and its subsidiary brand AHM hid the changes to prevent consumers from changing insurers and to plump up profits by $24 million ahead of the company's 2014 float.

The company denied any wrongdoing and, in a judgment delivered late on Wednesday, Justice David O'Callaghan agreed.