“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.