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Senator Claire McCaskill found an offer in the mail at her Washington condo last year that sounded too good to be true. The flier said the Missouri Democrat—a millionaire many times over—could apply for a free cell phone, complete with monthly service, paid for by the federal government. From what McCaskill could tell, “you just had to check the box” saying you met the income requirements, submit the form, and collect the phone, she says. The senator suspected something wasn’t right and began looking into it. What she found was a federal giveaway gone astray: In some instances, the government is handing out multiple phones to the same people. And there’s no national tracking system keeping tabs on who’s enrolled—or whether participants even qualify.
That’s not how the government envisioned the program, known as Lifeline, would work. Launched in 1985 to provide discounted land-line service for low-income Americans, it’s funded by the so-called universal service fees that phone companies tack onto bills every month. A family of four with an income of about $30,000 can qualify for a subsidized line, as can people receiving food stamps and other federal aid. The Federal Communications Commission allows states to decide who is eligible and whether applicants need to offer proof of income before they can get a phone.
Lifeline took off in the last decade, as prepaid cell phones became popular. In 2008 there were 7.1 million accounts nationwide. Today there are 12.5 million, about half of which are mobiles sold by Miami-based TracFone (AMX), Sprint (S), and hundreds of small regional companies. The government pays the carriers up to $10 a month for each Lifeline subscriber. Customers get free phones and 250 minutes of monthly airtime. It’s a good deal for them and a potential moneymaker for the mobile-phone providers, who can sell extra minutes once customers max out on their free ones. Both TracFone, which had 3.8 million Lifeline subscribers as of late last year, and Sprint, which declines to release figures, say revenue from selling consumers additional minutes is low.
The rapid growth means the government is paying out a lot more money—$1.6 billion in 2011, compared with $772 million in 2008. An audit last year found that 269,000 wireless Lifeline subscribers were receiving free phones and monthly service from two or more carriers. In December, McCaskill asked the FCC to examine Lifeline, writing, “I am troubled by the expansive potential for the program to be abused.”
The FCC says it is setting up a national database that wireless providers must check to see if an applicant already has a subsidized phone. Companies will also be required to purge Lifeline accounts that have been inactive for 60 days. “We will not tolerate waste or misuse of program funds,” said FCC Chairman Julius Genachowski, announcing the new rules on Jan. 31. TracFone welcomes the changes, says spokesman Jose Fuentes, noting the company already checks its subscriber rolls for inactive accounts. Sprint spokeswoman Crystal Davis says the company follows all Lifeline program guidelines. “Is it good to be driving down the street with a megaphone saying ‘Free Phone’?” asks McCaskill, who plans to keep tabs on the program. “No, that’s a waste of money.”
The bottom line: A government phone program for low-income Americans cost consumers $1.6 billion last year, compared with $772 million in 2008.