WSJournal. Cautionary Tale: Millions Improperly Claimed U.S. Phone Subsidies

The U.S. government spent about $2.2 billion last year to provide phones to low-income Americans, but a Wall Street Journal review of the program shows that a large number of those who received the phones haven't proved they are eligible to receive them.

WSJ's Spencer Ante has details of a $2.2 billion government program to give cell phones to poor people that resulted in phones winding up in the hands of people ineligible for the program.

The Lifeline program—begun in 1984 to ensure that poor people aren't cut off from jobs, families and emergency services—is funded by charges that appear on the monthly bills of every landline and wireless-phone customer. Payouts under the program have shot up from $819 million in 2008, as more wireless carriers have persuaded regulators to let them offer the service.

Suspecting that many of the new subscribers were ineligible, the Federal Communications Commission tightened the rules last year and required carriers to verify that existing subscribers were eligible. The agency estimated 15% of users would be weeded out, but far more were dropped.

A review of five top recipients of Lifeline support conducted by the FCC for the Journal showed that 41% of their more than six million subscribers either couldn't demonstrate their eligibility or didn't respond to requests for certification.

The carriers— AT&T T +1.05% Inc.; Telrite Corp.; Tag Mobile USA; Verizon Communications VZ +0.27% Inc.; and the Virgin Mobile USA unit of Sprint Nextel S +2.07% Corp.—accounted for 34% of total Lifeline subscribers last May. Two of the other largest providers, TracFone Wireless Inc. and Nexus Communications Inc., asked the FCC to keep their counts confidential. Results for the full program weren't available.

The program is open to people who meet federal poverty guidelines or are on food stamps, Medicaid or other assistance programs, and only one Lifeline subscriber is allowed per household.

The program, which is administered by the nonprofit Universal Service Administrative Co., has grown rapidly as wireless carriers persuaded regulators to let people use the program for cellphone service. It pays carriers $9.25 a customer per month toward free or discounted wireless service.

Americans pay an average of $2.50 a month per household to fund a number of subsidized communications programs, including Lifeline.

For the carriers, the program is a chance for them to sign up more subscribers and make a small profit, plus more money if customers go over their small initial allotment and need to buy more minutes or text messages. Carriers can set prices for their Lifeline subscribers as the companies wish.

Until last year, FCC rules didn't require carriers to certify to the FCC that subscribers were eligible. Consumers could self-certify, and in many states documentation wasn't required.

Carriers said many of the disqualified subscribers simply didn't reply when asked to prove their eligibility. They also said the FCC rules on self-certification, and the absence of a national database of participants, made it hard to keep ineligible people from signing up.

The FCC said it is investigating allegations that some Lifeline providers violated the rules, though it declined to comment on that probe. Carriers that don't properly confirm eligibility can be fined up to $150,000 for each violation for each day of a continuing violation, up to a maximum of $1.5 million. In egregious cases, a carrier could lose its ability to participate in the program.

Telrite said it confirms Lifeline eligibility but said it had been difficult to verify the one-phone-per-household rule.

A Verizon spokesman said the "vast majority" of the subscribers removed from its rolls didn't respond to eligibility checks. While Sprint found that some of its subscribers were no longer eligible, it, too, found that many others didn't respond, a person familiar with the carrier's operations said.

AT&T hadn't detected the ineligible subscribers because customers self-certified under old rules and because some states required the company to provide Lifeline service to people enrolled in certain state assistance programs, according to a person familiar with the company's thinking.

Tag Mobile didn't respond to requests for comment.

TracFone Chief Executive F.J. Pollak declined to say how many customers his company shed. Nexus Communications didn't respond to a request for comment.

Two years ago General Communication Inc. GNCMA -1.22% paid more than $1.5 million to settle allegations that Alaska DigiTel LLC, an Alaskan company it owns, submitted false claims to the FCC for more than four years. General Communication said the alleged misuse occurred before the company took day-to-day control of Alaska DigiTel.

Lifeline users have been a source of subscriber growth in the otherwise saturated U.S. market and helped fuel the expansion of companies like TracFone, now the fifth-largest U.S. wireless carrier.

The FCC until last year allowed consumers to self-certify, without requiring documentation, that they met federal poverty guidelines. Subscribers didn't have to recertify once they were enrolled in the program, and there were few checks on whether households signed up for more than one cellphone.

"The program rules we inherited were designed for the age of the rotary phone and failed to protect the program from abuse," FCC Chairman Julius Genachowski said.

The agency pushed through new rules last year, requiring documentation when a Lifeline customer signs up. Consumers also must certify that no one else in their households is using the program. Carriers now have to check a state or federal social-service database to confirm eligibility and must reverify eligibility every year.

Carriers were required by Jan. 31 to report the number of subscribers they had removed from Lifeline as of the end of last year. The data reviewed by The Wall Street Journal came from those reports.

The FCC said new verification procedures saved nearly $214 million last year, and projected total savings over the next three years would reach $2 billion. Disbursements under the program began to drop in the third quarter after 12 consecutive quarters of increases.

Write to Spencer E. Ante at spencer.ante@wsj.com