Fraud and abuse grow after subsidized telephone program expands

A federal program subsidizing phones for the poor increased from 6.8 million to 18 million recipients from 2008 — the year it was expanded to include cell phones — to May 2012.

And fraud and abuse from the expansion have been far more extensive than expected, to the extent that tougher enforcement of long-existing rules is projected to bring in enough money to finance the expansion of the program to provide low-income users with free Internet service, according to the Federal Communications Commission report released last week. Up to 15 percent of subscribers in the program are ineligible, the FCC found.

Only one member per family is eligible for a cellphone, but a recent review by FCC investigators found some 270,000 families, in just 12 states, who were violating that rule. Verification is taken only on an intermittent, state-by-state basis because a national database will not be ready until later this year, the report says.

Those early measures, combined with requiring recipients to self-certify their eligibility each year and terminating unused phones, saved $214 million in less than a year, or $1 of every $10 spent on the program. Reforms to weed out ineligible recipients, the FCC projects, could save $2 billion over the next three years.

The phones are intended for use in job searches and medical care. Receiving other government support, such as food stamps, subsidized housing and cash welfare makes a person eligible for the free phone service.

The industry has rapidly become dominated by TracFone Technologies Inc., whose business model has focused largely on taking advantage of the subsidies, spending $41 million advertising its “free” phones to the poor in 2010. The Miami-based company resells major providers’ services, and it successfully petitioned for an exception to a rule that made only companies actually controlling cellular service eligible.

Whereas many providers pass on the Lifeline subsidy as a $9 discount, TracFone makes the phones and their service plans entirely free and goes door-to-door offering them to consumers. Providers have not always made clear that the phones are part of a government program with specific eligibility requirements, the FCC says.

As lawmakers have sought to rein in the program, TracFone’s lobbyists have been there to push back. Last Congress, it lobbied against bills titled the Surcharge Fairness Act, the Stop Taxpayer Funded Cell Phones Act, and one that would “revisit the universal service support program … to reduce waste, fraud and abuse,” lobbying disclosures show.

Rep. Tim Griffin, Arkansas Republican, has reintroduced a bill to combat what he calls “Uncle Sam’s Unlimited Plan,” and restore it to landlines only. Mr. Griffin’s attention was attracted to the program when his own wife received an application, and when constituents reported receiving unrequested phones mailed to deceased relatives. The program doesn’t meet the efficacy threshold that would warrant the government requiring consumers to fund the program, and the FCC has done the “bare minimum” to rein in abuse, he said.

“There are people who own cars and are getting free cellphones,” he said.

A car helps one find a job, too, he noted, asking whether free cars might be next. “Where do you draw the line?”