Georgia Targets Obamaphone Fraud

by Jillian Kay Melchior
The Peach State’s reform attempt should earn national attention.

The telltale signs of fraud and abuse lurk unseen in many a spreadsheet, and it takes a skeptic to hunt them down and bring them to light. In Georgia, the numbers for the Lifeline subsidized-phone program weren’t adding up, so one state official decided to act.

“We had 125 percent more [subsidized] phones out there than we had people who could qualify. By my estimates, at least 300,000 to 400,000 of the phones [distributed in Georgia] were fraudulent,” says Georgia public-service commissioner Doug Everett. “Since the FCC was not doing anything about it, I figured maybe we could do something on the state level.”

In a 3–2 vote last month, Georgia’s Public Service Commission passed Everett’s proposed measure, so beginning in January, the state will require phone companies to charge Lifeline beneficiaries $5 a month. For a cell phone with 250 minutes and 250 texts a month, that’s still a pretty good deal — unless, of course, you’re accustomed to getting the same for nothing at all.

Everett’s plan is an attempt to discourage fraud on the part of both Lifeline users and phone vendors. The Federal Communications Commission, which oversees the subsidized-phone program, neither imposes such customer payments nor prohibits states from requiring them.

An FCC spokesman tells National Review Online: “We will be following closely what happens in Georgia as we continue to aggressively enforce our rules and consider whether any further reforms are needed to protect the program from waste, fraud, and abuse.”

The Lifeline program began in 1984, an attempt to ensure that America’s poorest had access to landline phone service to call 911, work, or family members. But in 2008, the FCC expanded the service to include mobile phones, and under the Obama administration, as welfare rolls swelled, more people became eligible for a subsidized phone — part of the reason they’re often known as “Obamaphones.”

By 2012, the cost of the Lifeline program had risen to $2.189 billion a year, up from $822 million before cell phones were included. In Georgia, after Lifeline expanded from landlines to mobile phones, the number of users shot from 150,000 to almost 1.1 million, Everett says.

Fraud and abuse abound because the Lifeline program is predicated on perverse incentives. Essentially, phone companies find themselves running a welfare program, but the more it grows, the more they profit. Street-level vendors usually work on commission, earning around $3 for each person they enroll. Likewise, phone companies get $9.25 a month from the taxpayers for each phone they distribute.

“Right now, all [phone companies] do is sign somebody up, send the government a bill each month, and that’s it — they don’t have to do anything,” Everett says. In Georgia, phone companies participating in the Lifeline program would “pay people to sit on the streets under a tent or on the back of a pickup truck and give them a commission for each phone they put out,” he says. “Those people could care less whether or not they would qualify. All they cared about was getting the phone out.”

Doling out Obamaphones is a big moneymaker for the phone companies involved. For example, TracFone, owned by Carlos Slim, one of the richest men in the world, received almost half a billion dollars in Lifeline payments in 2011 alone.

Further corrupting the incentive structure, the FCC’s penalties for violating Lifeline’s rule are hand slaps when compared with phone companies’ earnings from the program. For example, TerraCom made $52 million from the Lifeline program last year but paid a settlement of only $1 million after the FCC discovered that some customers had received more than one phone, which is against the Lifeline rules.

Given the corrupt underlying incentive structure, it’s little wonder that a recent FCC audit of the top five participating phone companies found that 41 percent of Lifeline subscribers, more than 6 million people, hadn’t proven their eligibility.

Georgia’s $5 Lifeline fee is one of the most promising plans to date for correcting the perverse incentives. Everett explained that because beneficiaries will have to pay $5, they might be less inclined to sign up for duplicate phones, a common violation of the Lifeline rules. And though phone companies will technically now earn an extra $5 per month in addition to the $9.25 they already receive courtesy of the government, sending out a bill costs more than $5. The Georgia plan won’t eliminate phone companies’ taxpayer-funded profits, but it will chip away at them.

Not surprisingly, phone companies are fighting to hold on to the honey. The trade association of the cell-phone industry launched a legal challenge, claiming that Georgia’s government is acting outside of its authority by setting phone rates.

Everett vehemently disagrees with that assessment: “We’re not setting the phone prices. This is not a rate. This is a fee to participate in the program. They can either put it on their rate or not put it on their rate.”

If the phone companies don’t manage to topple this reform, Georgia’s Obamaphone experiment will be noteworthy nationwide. The state is making an unprecedented effort to address the flawed underlying incentive structure of the Lifeline program, and it has the potential to curb rampant fraud and save taxpayers millions of dollars. If we’re going to have such a program at all, at the very least it should have this commonsensical provision. It’s truly something to call home about.

— Jillian Kay Melchior is a Thomas L. Rhodes Fellow for the Franklin Center for Government and Public Integrity.

Did you like this?