Subsidized cellphone service comes at a cost: 'Free' phone service costs taxpayers $2 billion a year

More than 10 million U.S. residents pay nothing for their cellphone service. So who pays their bills?

The rest of us.

If you take a close look at your monthly phone bill you'll likely see a fee called USF or "Universal Service." That's the fund that collects fees mandated by the federal government to subsidize phone service for those who can't afford to pay for it themselves, reported our Cincinnati Scripps Station WCPO .

Since the days of President Ronald Reagan, the Federal Communications Commission authorized payment only for land-line phones. The fund would pay for hooking up one line per household, then subsidize most if not all of the monthly phone bill.

The program cost less than $500,000 in 2007 before the FCC decided to let people apply for subsidized cell service. Today the program costs more than $2 billion a year.

While it has been widely decried as the "Obama phone," the free cellphone was added in 2008 during the waning days of the George W. Bush presidency.

Virtually any type of government assistance now comes with a government phone. Regardless of income, participation in any one of nine programs automatically qualifies the applicant, including food stamps, Section 8 housing, temporary assistance, Medicaid or school lunch subsidies.

The offering of free cellphones came at the same time as the great recession, so more people qualified. It has helped some families get back on their feet by providing a phone they can use to apply for jobs.

But the cellphone applications now include a place for the needy to enter their home phone numbers. If they already have a phone, why do they need the Lifeline service?

"This has become more than being a Lifeline for some people. It's about a free phone,"  said Rep. Steve Stivers, a second-term Republican congressman representing Ohio.

Today there are actually more free cellphones out there than there are subscribers.

"Some people had three or four of these Lifeline phones," said Congressman Stivers.

That's because the government and most of the phone companies were not tracking applications to make sure people weren't getting more than one phone. A study by the Government Accountability Office revealed widespread waste, fraud and abuse in the Lifeline program.

"In fact in Ohio," Stivers added, "it's about $2.5 million -- just the duplicate Lifeline phones."

A Hand-Out With A Marketing Budget

How could this happen? No government agency would review, approve or deny applications for Lifeline service. The FCC left that up to the phone companies, which had a strong incentive to find a way to qualify as many applicants as possible.

There are more than 1 million free government cellphones in Ohio alone.

"We believe you," said Rep. Stivers, mimicking the phone companies. "We make money on this, but we believe you!"

Every month, the typical subscriber gets another 250 free minutes and 250 free texts, and the federal fund pays the bills.

There are hundreds of wireless companies pushing the subsidized cellphone service in ads on the Internet. Some of those companies send extra blank applications to approved subscribers so they can get their friends, family members and neighbors to apply.

In a news release, the FCC acknowledged "perverse incentives" for wireless companies and subscribers to game the system.

There are even recruitment ads where wireless companies encourage prospective sales people to "give away government phones" and earn "high commissions."

Once the government is on the hook for the basic service, many of the wireless providers engage in up-sell techniques to convince subscribers that they need more minutes at additional cost.

The phone itself is absolutely free in most cases.

Assurance Wireless , the Lifeline brand of Virgin Mobile USA and Sprint, is one of the largest providers in Ohio. Assurance told the I-Team that it pays for the phone handset and accessories, not the government. That's true -- the USF will not reimburse phone companies for supplying the phone.

But many companies found a way around that, called Link-Up. Another federal program, Link-Up was originally designed to pay half the cost of establishing land-line service, capped at $30 per line. The subscriber was supposed to pay the other half. Also, that fee was based on what companies charged regular paying customers.

The FCC discovered companies were getting the full $30 from the fund without charging the subscriber the other half, and paying customers often had their connection fees waved. Only the government was paying the fee.

Government phones on eBay?

WCPO found dozens of Lifeline phones for sale on eBay .

We looked for phones with the Assurance Wireless label because most other companies use brand names that are also marketed as regular or pre-paid cellphones. To get an Assurance phone from Virgin Mobile/Sprint,

applicants have to pre-qualify for Lifeline service.

One listing offered several Assurance phones. The I-Team bought one of those from an eBay user who says he sells items confiscated by police as part of criminal investigations. The phone we received was still active with an Atlanta phone number and dozens of contacts still loaded. Our attempts to discover why the police may have seized the phone were unsuccessful, but the seller assured us there were plenty more where that one came from.

The second phone we bought was shipped new in the box from an eBay member in Florida. The phone had never been activated and still had the protective stickers on it.

The original shipping label was still on the box, underneath the label used to ship the phone to us. Using a backlight, we were able to see the return address that we traced to the handset supplier, and the shipping address for the Lifeline applicant. We tracked the phone to mailbox on 38th Place in Miami, Florida. The current residents did not return our calls.

When we contacted Assurance Wireless, the company reiterated that the government did not pay for the phones we found for sale on the web.

"As for attempted illegal transfer of the handsets or service, we continually monitor the Internet for attempted sales of the service, which are rare, and intervene when necessary," said Jack Pflanz, communications manager for Assurance Wireless.

Pflanz also pointed out that Virgin Mobile absorbs the USF fees and does not pass them on to its paying customers.

But at the same time Sprint has accepted hundreds of millions of dollars in payments from the federal Lifeline program, it has used some of its revenue to send jobs overseas. When we called Assurance Wireless customer service, the operator who answered said he was in Bogota, Colombia.

WCPO visited with one Assurance subscriber in Indiana who had trouble activating his phone. Despite an approval letter from Assurance, the customer service representative in Colombia kept insisting the subscriber  had a pre-paid Virgin Mobile phone instead, and encouraged him to buy minutes. We have no way of knowing if the company was also billing the government for his service.

In an attempt to activate his government phone, the man was asked to give otherwise-confidential information to a stranger in South America.

Congressman Stivers is worried that Americans are sending "personally identifiable financial information to somebody in Bogota, Columbia that then could use that to steal their identity," he said.

FCC Cracks Down

The GAO report revealed a nearly-complete lack of oversight in the Lifeline program.

The FCC is now implementing recommendations from that study, including the development of a database to track multiple phones registered to one household or even one person.

There are random audits of the subscriber list, and all current recipients are now asked to re-certify that they qualify every year. The first time the re-certification was required late last year, one out of every three subscribers failed to send in their documents.

The FCC is now issuing citations to subscribers who abuse the system. One cites a single subscriber for having six different government cellphones on five different carriers including Assurance, i-wireless, Reachout Wireless, TracFone, and SafeLink.

Sprint, the parent company of Virgin Mobile USA and its Assurance Wireless brand, tells shareholders in its latest annual report that "USF receipts increased substantially" in the prior year, and "we anticipate them to continue to increase..."

But Sprint also warned shareholders "changes in the Lifeline program as a result of the ongoing FCC proceeding or other legislation or regulations could negatively impact growth in the Assurance Wireless" business.

Congressman Stivers is a co-sponsor of House Resolution 176, the "Stop Taxpayer Funded Cell Phones Act" which is currently before a congressional committee. It would return the program to its original landline-only offering, eliminating the cell phone option that costs $1.7 billion a year.

The FCC just eliminated the Link-Up program this year because regulators determined the cost of establishing service is close to nothing in the digital age, and some wireless companies were using it to defray the cost of the handsets.

Wireless companies are still offering the free phones, and making a profit on the program.

Similar to the business model for paying customers, the Lifeline cellphone itself is a loss-leader for the companies that stand to make millions, both in monthly fees billed to the government, and up-sell charges for extra minutes paid by the subscriber.

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