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Piecemeal Lifeline Reform Efforts Unlikely to Fix Its High Costs

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Lost among the outrage over the FCC’s largely inconsequential decision to revoke Lifeline Broadband Provider status from nine carriers is the problem of the program’s economic costs. The FCC’s own estimates suggest it may cost between 25 and 41 cents to provide a dollar of subsidy. Another estimate done by four economists (this writer being one of them) found the cost might be closer to 65 cents per dollar.

These costs, ironically, are largely the result of the Commission’s well-intentioned effort to combat earlier fraud in the program. They tell a story of how poorly designed rules can create a cycle of increasing costs as a patchwork of changes tries to fix problems as they are revealed.

Before 2008, Lifeline subsidy payments largely went to subscribers of traditional landline service. In 2008, the FCC allowed wireless carriers to provide Lifeline support as well. Unfortunately, the agency did not adopt protective mechanisms to account for the different nature of landline and wireless services. Most importantly, landlines belong to residences and wireless phones belong to individuals, meaning that while a given household typically subscribes to no more than a single landline, it is likely to have multiple cell phones. Additionally, it is not easy to transfer ownership of a landline, but handing off your cell phone to someone else is easy. Worse, it created incentives for bad behavior by some providers. For example, authorized carriers verified the customer’s eligibility for the program and received per-subscriber subsidy payments. They benefited by maximizing subscriptions, which meant de-emphasizing eligibility checks.

Lifeline expenditures soon skyrocketed from $819 million in 2008 to almost $2.2 billion in 2012 (see figure below). A significant share of the increase was due to fraud and abuse, resulting in calls for reforms and even attempts to eliminate the wireless part of the subsidy. In 2012 the Commission issued an Order intended to reduce fraud by mandating stricter reporting requirements and creating a nationwide database that would contain all Lifeline beneficiaries in order to eliminate duplicate and ineligible subscribers.

Source: Universal Service Administrative Company.
http://www.usac.org/about/tools/fcc/filings/default.aspx

The FCC’s efforts to root out waste and abuse were largely successful – program payments decreased from 2.2 billion in 2012 to 1.5 billion in 2015. However, the reforms were not free. According to the FCC, the 2012 Order imposed somewhere between $404 and $624 million in additional costs on carriers and low-income recipients. Nearly all of the estimated costs of the administrative burden of the new requirements—about 99%—fall on the carriers, although that’s only because the Commission assumed that subsidy recipients value their time at only $1 per hour. According to another study the total costs levied on carriers actually amount to $977 million (or 65% of the subsidy budget). More appropriately valuing the time of the people who are supposed to benefit from the subsidy would increase those estimates further.

Given these excessive administrative costs, why do companies participate? Some do not, even asking permission to avoid participating. Some do so in order to receive other, larger, subsidies under the high-cost program. For others, participation is mandatory. A carrier must participate if it is the only eligible carrier serving an area. Others have found loopholes that make the program profitable. The FCC recently fined Total Call Mobile $30 million for enrolling tens of thousands of duplicate and ineligible subscribers. Then-Commissioner Pai argued that those numbers were only the tip of the iceberg: he found systematic loopholes in the program that allowed carriers to enroll hundreds of thousands of non-existent subsidy recipients and bypass safeguards while enrolling several millions of people.

In 2016 the FCC attempted to address additional problems. It created a system independent of the carriers for verifying customer eligibility and administering certain other program requirements. The FCC hopes the new system will eliminate opportunities for duplicitous behavior, automate the process so that carriers are reimbursed based on the number of customers they actually serve rather than the number they claim to serve and drive down the costs of the program through economies of scale. The FCC hopes that reducing the administrative burden will attract more participation from the carriers. The new system is currently under development and won’t be fully implemented until 2019.

While FCC Chairman Ajit Pai has pledged to support Lifeline, including its extension to broadband, he largely disagreed with many of the reforms the FCC proposed last year and pointed out existing program inefficiencies in his dissenting statement. Indeed, a program that creates bad incentives for providers with the costs that may exceed half the amount distributed is not likely to pass any cost-effectiveness test. That is without even considering whether the money it distributes has any measurable effect.

Chairman Pai has also supported delegating the authority to approve carrier participation in the Lifeline program to the states. While it is unclear whether that would reduce administrative burdens, it is clear that it makes sense to rethink many aspects of the way the program works with an eye towards increasing efficiency. Chairman Pai is right to focus on low-income subsidies, and an important part of that is better understanding what works and how to fix what doesn’t.

* Olga Ukhaneva is a Research Assistant Professor at McDonough School of Business at Georgetown University and contributor to TPI’s blog.