Telecommunications: Additional Action Needed to Mitigate Significant Risks in FCC's Lifeline Program

Created in the mid-1980s, FCC's Lifeline program provides discounts to eligible low-income households for home or wireless telephone and, as of December 2016, broadband service. Lifeline reimburses telephone companies that offer discounts through the USF, which in turn is generally supported by consumers by means of a fee charged on their telephone bills.

This testimony is based on GAO's May 2017 report and discusses steps FCC has taken to measure Lifeline's performance in meeting goals; steps FCC and USAC have taken to enhance controls over finances, subscribers, and providers; and any weaknesses that might remain.

For the May 2017 report, GAO analyzed documents and interviewed officials from FCC and USAC. GAO also analyzed subscriber data from 2014 and performed undercover tests to identify potential improper payment vulnerabilities. The results of this analysis and testing are illustrative, not generalizable.

In its May 2017 report GAO found the Federal Communications Commission (FCC) has not evaluated the Lifeline program's (Lifeline) performance in meeting its goals of increasing telephone and broadband subscribership among low-income households by providing financial support, but it has recently taken steps to begin to do so. FCC does not know how many of the 12.3 million households receiving Lifeline as of December 2016 also have non-Lifeline phone service, or whether participants are using Lifeline as a secondary phone service. FCC revamped Lifeline in March 2016 to focus on broadband adoption; however, broadband adoption rates have steadily increased for the low-income population absent a Lifeline subsidy for broadband. Without an evaluation, which GAO recommended in March 2015, FCC is limited in its ability to demonstrate whether Lifeline is efficiently and effectively meeting its program goals. In a March 2016 Order, FCC announced plans for an independent third party to evaluate Lifeline design, function, and administration by December 2020.

FCC and the Universal Service Administrative Company (USAC)—the not-for-profit organization that administers the Lifeline program—have taken some steps to enhance controls over finances and subscriber enrollment. For example, FCC and USAC established some financial and management controls regarding billing, collection, and disbursement of funds for Lifeline. To enhance the program's ability to detect and prevent ineligible subscribers from enrolling, FCC oversaw completion in 2014 of an enrollment database and, in June 2015, FCC adopted a rule requiring Lifeline providers to retain eligibility documentation used to qualify consumers for Lifeline support to improve the auditability and enforcement of FCC rules.

Nevertheless, in its May 2017 report, GAO found weaknesses in several areas. For example, Lifeline's structure relies on over 2,000 Eligible Telecommunication Carriers that are Lifeline providers to implement key program functions, such as verifying subscriber eligibility. This complex internal control environment is susceptible to risk of fraud, waste, and abuse as companies may have financial incentives to enroll as many customers as possible. On the basis of its matching of subscriber to benefit data, GAO was unable to confirm whether about 1.2 million individuals of the 3.5 million it reviewed, or 36 percent, participated in a qualifying benefit program, such as Medicaid, as stated on their Lifeline enrollment application. FCC's 2016 Order calls for the creation of a third-party national eligibility verifier by the end of 2019 to determine subscriber eligibility. Further, FCC maintains the Universal Service Fund (USF)—with net assets of $9 billion, as of September 2016—outside the Department of the Treasury in a private bank account. In 2005, GAO recommended that FCC reconsider this arrangement given that the USF consists of federal funds. In addition to addressing any risks associated with having the funds outside the Treasury, FCC identified potential benefits of moving the funds. For example, by having the funds in the Treasury, USAC would have better tools for fiscal management of the funds. In March 2017, FCC developed a preliminary plan to move the USF to the Treasury. Until FCC finalizes and implements its plan and actually moves the USF funds, the risks that FCC identified will persist and the benefits of having the funds in the Treasury will not be realized.

In its May 2017 report, GAO made seven recommendations, including that FCC ensure plans to transfer the USF from the private bank to the Treasury are finalized and implemented expeditiously. FCC generally agreed with all the recommendations.

I am pleased to be here today to discuss the Federal Communications  Commission’s (FCC) oversight of the Lifeline program (Lifeline). Over the  past two decades, telecommunications carriers and their customers have  paid over $100 billion to support the federal policy of “universal service.”  Universal service is the principle that all Americans should have access to  communications services. FCC carries out this policy through four  programs, including Lifeline. Lifeline was created in the mid-1980s to  promote telephone subscribership among low-income households. In the  mid-2000s, such service came to include wireless communications, and,  in December 2016, FCC also began including broadband service.  Average Lifeline enrollment as of the fourth quarter of calendar year 2016  was approximately 12.3 million subscribers.

To participate in Lifeline, households must either have an income that is  at or below 135 percent of the Federal Poverty Guidelines or participate in  one of several qualifying assistance programs, such as Medicaid or the  Supplemental Nutrition Assistance Program (SNAP). After subscribers  are enrolled in Lifeline, they receive a monthly benefit on home or  wireless phone and broadband service. The Lifeline benefit can lower or  eliminate the cost of a subscriber’s monthly phone or Internet bill.

By statute, every telecommunications carrier providing interstate  telecommunications services—including Lifeline providers—must  contribute to federal universal service unless exempted by FCC.  Contributions are deposited into the Universal Service Fund (USF).  Although not required to do so, carriers typically pass on the cost of USF  fees as a separate line item to their customers’ phone bills. A not-for- profit, private corporation designated by FCC as the administrator of  universal service programs, the Universal Service Administrative  Company (USAC) pays Lifeline providers a subsidy from the USF for  each subscriber to offset forgone revenues. From calendar year 1998  through 2016, USAC had disbursed approximately $20.2 billion to Lifeline  providers.

In May 2017, we published a report on FCC’s oversight of Lifeline that  identified steps FCC has taken in the last few years to enhance the  integrity of the program and stated the weaknesses that remained. We  also made seven recommendations to improve FCC’s oversight of the  program, which the agency agreed to implement.

My statement today discusses key findings from our May 2017 report, as  well as steps FCC has taken and the related recommendations we made.  Specifically, this testimony discusses (1) the extent to which Lifeline  demonstrates effective performance towards program goals; (2) steps  FCC and USAC have taken to improve financial controls in place for  Lifeline and the USF, and any remaining weaknesses that might exist; (3)  steps FCC and USAC have taken to improve subscriber eligibility  verification, and any remaining weaknesses that might exist; and (4)  steps FCC and USAC have taken to improve oversight of Lifeline  providers, and any remaining weaknesses that might exist.

For our May 2017 report, we reviewed documents and interviewed  multiple stakeholders associated with Lifeline, including FCC, FCC’s  Office of Inspector General (OIG), and USAC, among others. We also  examined USAC financial data, including USF bank account statements  and payment data, and interviewed USF account managers at the bank  that holds USF funding. Further, we reviewed internal financial controls  established by FCC and USAC and performed data matching and  analysis to identify potential improper payments using Lifeline’s  enrollment data from the National Lifeline Accountability Database  (NLAD) and relevant beneficiary databases. The results of the data  analysis are illustrative rather than generalizable. We also performed  undercover work to test the vulnerability for improper payments of funds  disbursed to both subscribers and Lifeline providers. For example, we  submitted 21 Lifeline applications using false information and fabricated  supporting documents to determine whether we could obtain Lifeline  benefits. These undercover tests were for illustrative purposes to highlight  any potential internal control vulnerabilities and are not generalizable to  the broader universe of subscribers and providers. Additional information  on our scope and methodology is available in our May 2017 report. Our  audit work was performed in accordance with generally accepted  government auditing standards, and our related investigative work was  done in accordance with investigative standards prescribed by the  Council of the Inspectors General on Integrity and Efficiency.

FCC Has Not Evaluated Lifeline’s Performance in Meeting Program Goals but Has Taken Recent Steps toward Evaluation

FCC has not evaluated Lifeline’s performance in meeting program goals  but, as we found in May 2017, has taken recent steps toward evaluation.  According to GAO’s Cost Estimating and Assessment Guide, to use  public funds effectively the government must meet the demands of  today’s changing world by employing effective management practices and  processes, including the measurement of government program  performance. In the past, FCC has called for program evaluations to  review the administration of universal service generally, including Lifeline,  but has not completed such evaluations. For example, FCC specified that  it would review USAC 1 year after USAC was appointed as the  permanent administrator to determine whether the universal service  programs were being administered effectively. This review, which was  planned to have been completed by 1999, was never done. In 2005, FCC  awarded a contract to the National Academy of Public Administration to  study the administration of the USF programs generally, examine the  tradeoffs of continuing with the current structure, and identify ways to  improve the oversight and operation of universal service programs.  However, we reported in May 2017 that FCC officials stated FCC  subsequently terminated the contract and the study was not conducted.

In March 2015, we found that FCC had not evaluated Lifeline’s  effectiveness in achieving its performance goals of ensuring the  availability of voice service for low-income Americans, while minimizing  the burden on those who contribute to the USF. We recommended, and  FCC agreed, to conduct a program evaluation to determine the extent to  which Lifeline is efficiently and effectively reaching its performance goals.

Our May 2017 report raised additional questions about Lifeline’s  effectiveness in meeting its program goals. For example, we reported  that:

FCC did not know how many of the 12.3 million households receiving  Lifeline as of December 2016 also have non-Lifeline phone service  (for which they pay out of pocket) along with their Lifeline benefit.  Without knowing whether participants are using Lifeline as a primary  or secondary phone service, we concluded that it is difficult for FCC to  determine whether it is achieving the program’s goal of increasing  telephone subscribership among low-income consumers while  minimizing the USF contribution burden.

FCC revamped Lifeline in March 2016 to focus on broadband  adoption and generally phase out phone service, in part because FCC  recognized that most eligible consumers have phones without Lifeline  and to also close the “digital divide” of broadband adoption between  low-income households and the rest of the country. However,  broadband adoption rates have steadily increased for the low-income  population absent a Lifeline subsidy for broadband. We found that at  least two companies operating in a total of at least 21 states had  begun offering in-home non-Lifeline broadband wireline support for  less than $10 per month to individuals that participate in public- assistance programs, such as SNAP or public housing. The offered  rate of these providers’ own low-income broadband service of $10 per  month was less expensive than FCC’s broadband reasonable- comparability cost benchmark of approximately $55 per month, which  Lifeline subscribers would be paying for a similar level of service.

Our May 2017 report also found that FCC has recently taken some steps  toward evaluating Lifeline’s performance in meeting program goals.  Specifically, in the 2016 Lifeline Modernization Order, FCC instructed  USAC to hire an outside, independent, third-party evaluator to complete a  program evaluation of Lifeline’s design, function, and administration. The  order stipulated the outside evaluator must complete the evaluation and  USAC must submit the findings to FCC by December 2020. As FCC  expects Lifeline enrollment to increase as the program is expanded to  include broadband service, this expansion could carry with it increased  risks for fraud, waste, and abuse, as was the case with past expansions  of the program. Completing the program evaluation as planned, and as  we recommended in 2015, would help FCC determine whether Lifeline is  meeting its stated goals of increasing telephone and broadband  subscribership among low-income consumers, while minimizing the  burden on those who contribute to the USF.

Financial Controls Exist, with Others Planned, for the Lifeline Program, but Weaknesses Remain

In our May 2017 report we found that FCC and USAC have established  financial controls for Lifeline, including obtaining and reviewing  information about billing, collecting, and disbursing funds. They have also  developed plans to establish other controls, such as establishing a  national eligibility verifier (National Verifier) for Lifeline providers to  determine the eligibility of applicants seeking Lifeline service. However,  as discussed in our May 2017 report, we found that weaknesses remain,  including the lack of requirements to effectively control program  expenditures above approved levels, concerns about the transparency of  fees on customers’ telephone bills, and a lack of FCC guidance that could  result in Lifeline and other providers paying inconsistent USF  contributions. To address these concerns, we recommended the  Chairman of FCC (1) require Commissioners to review and approve, as  appropriate, spending above the budget in a timely manner; (2) require a  review of customer bills as part of the contribution audit to include an  assessment of whether the charges, including USF fees, meet FCC  Truth-in-billing rules with regard to labeling, so customer bills are  transparent, and appropriately labeled and described, to help consumers  detect and prevent unauthorized changes; and (3) respond to USAC  requests for guidance and address pending requests concerning USF  contribution requirements to ensure the contribution factor is based on  complete information and that USF pass-through charges are equitable.  FCC generally agreed with those recommendations.

In addition, we found that USAC’s banking practices for the USF result in  oversight and accountability risks that FCC has plans to mitigate.  Specifically, FCC maintains USF funds—whose net assets as of  September 2016 exceeded $9 billion—outside of the U.S. Treasury  pursuant to Office of Management and Budget (OMB) advice provided in  April 2000. OMB had concluded that the USF does not constitute public  money subject to the Miscellaneous Receipts Statute, 31 U.S.C. § 3302,  a statute that requires that money received for the use of the United  States be deposited in the Treasury unless otherwise authorized by law.  As such, USF balances are held in a private bank account. However,  subsequent to this OMB advice, in February 2005 we reported that FCC  should reconsider this determination in light of the status of universal  service monies as federal funds.

As discussed in our May report, according to correspondence we  received from the FCC Chairman’s Senior Legal Counsel, as of March  2017, FCC had decided to move the funds to the Treasury. FCC identified  potential benefits of moving the funds to the Treasury. For example, FCC  explained that having the funds in the Treasury would provide USAC with  better tools for fiscal management of the funds, including access to real- time data and more accurate and transparent data. According to FCC,  until the USF is moved into the Treasury, there are also some oversight  risks associated with holding the fund in a private account. For example,  the contract governing the account does not provide FCC with authority to  direct bank activities with respect to the funds in the event USAC ceases  to be administrator of the USF. After we raised this matter with FCC  officials during the course of our review, beginning in November 2016,  FCC sought to amend the contract between USAC and the bank to  enable the bank to act on FCC instructions independently of USAC in the  event USAC ceases to be the administrator. However, as of May 2017,  the amended contract had not yet been signed.

While FCC has put in place a preliminary plan to move the USF funds to  the Treasury, as well as plans to amend the existing contract with the  bank as an interim measure, several years have passed since this issue  was brought to FCC’s attention without corrective actions being  implemented. Further, under FCC’s preliminary plan, it would not be until  next year, at the earliest, that the funds would be moved to the Treasury.  In May 2017, while reviewing a draft of this report, a senior FCC official  informed us that FCC experienced some challenges associated with  moving the funds to the Treasury, such as coordinating across the  various entities involved, which raised some questions as to when and  perhaps whether the funds would be moved. Until FCC finalizes and  implements its plan and moves the USF funds, the risks that FCC  identified will persist and the benefits of having the funds in the Treasury  will not be realized. As a result, in our May 2017 report, we recommended  that the Chairman of FCC take action to ensure that the preliminary plans  to transfer the USF funds from the private bank to the Treasury are  finalized and implemented as expeditiously as possible. FCC agreed with  this recommendation.

FCC and USAC Have Implemented Some Controls to Improve Subscriber Eligibility Verification, but Weaknesses Remain

FCC and USAC have implemented controls to improve subscriber  eligibility verification, such as implementing the NLAD database in 2014,  which helps carriers identify and resolve duplicate claims for Lifeline- supported services. However, as discussed in our May 2017 report, our  analysis of data from 2014, as well as our undercover attempts to obtain  Lifeline service, revealed significant weaknesses in subscriber eligibility  verification. Lifeline providers are generally responsible for verifying the  eligibility of potential subscribers, but we found that their ability to do so is  hindered by a lack of access to, or awareness of, state eligibility  databases that can be used to confirm eligibility prior to enrollment. For  example, not all states have databases that Lifeline providers can use to  confirm eligibility and some providers with whom we spoke were unaware  of databases that were potentially available to them. These challenges  might be overcome if FCC establishes a National Verifier, as it plans to do  nationwide by the end of 2019, to remove responsibility for verifying  eligibility from the providers. Additionally, since USAC was not  maintaining and providing information to providers about these  databases, we recommended they maintain and disseminate an updated  list of state eligibility databases available to Lifeline providers that  includes the qualifying programs those databases access to confirm  eligibility, to help ensure Lifeline providers are aware of state eligibility  databases and USAC audits of Lifeline providers can verify that available  state databases are being utilized to verify subscriber eligibility. FCC  agreed with the recommendation.

For our May 2017 report, to identify Lifeline subscribers who were  potentially ineligible to participate in the program, we tested the eligibility  of subscribers who claimed participation in Medicaid, SNAP, and  Supplemental Security Income (SSI) using NLAD data as of November  2014. We focused our analysis on these three programs because FCC  reported in 2012 that these were the three qualifying programs through  which most subscribers qualify for Lifeline. We compared approximately  3.4 million subscribers who, according to information entered in NLAD,  were eligible for Lifeline due to enrollment in one of these three programs  to eligibility data for these programs.

On the basis of our analysis of NLAD and public-assistance data, we  could not confirm that a substantial portion of selected Lifeline  beneficiaries were enrolled in the Medicaid, SNAP, and SSI programs,  even though, according to the data, they qualified for Lifeline by stating on  their applications that they participated in one of these programs. In  total, we were unable to confirm whether 1,234,929 subscribers out of the  3,474,672 who we reviewed, or about 36 percent, participated in the  qualifying benefit programs they stated on their Lifeline enrollment  applications or were recorded as such by Lifeline providers.

If providers claimed and received reimbursement for each of the 1.2  million subscribers, then the subsidy amount associated with these  individuals equals $11.4 million per month, or $137 million annually, at the  current subsidy rate of $9.25 per subscriber. Because Lifeline  disbursements are based on providers’ reimbursement claims, not the  number of subscribers a provider has in NLAD, our analysis of NLAD data  could not confirm actual disbursements associated with these individuals.  Given that our review was limited to those enrolled in SNAP or Medicaid  in selected case-study states, and SSI in states that participated in NLAD  at the time of our analysis, our data results are likely understated  compared to the entire population of Lifeline subscribers. These results  indicate that potential improper payments have occurred and have gone  undetected. We plan to refer potentially ineligible subscribers identified  through our analysis for appropriate action as warranted.

Our undercover testing, as discussed in our May 2017 report, also found  that Lifeline may be vulnerable to ineligible subscribers obtaining service  and the testing found examples of Lifeline providers being nonresponsive,  or providing inaccurate information. To conduct our 21 tests, we  contacted 19 separate providers to apply for Lifeline service. We applied  using documentation fictitiously stating that we were enrolled in an eligible  public-assistance program or met the Lifeline income requirements. We  were approved to receive Lifeline services by 12 of the 19 Lifeline  providers using fictitious eligibility documentation. We also experienced  instances during our undercover tests where our calls to providers were  disconnected, and where Lifeline provider representatives transmitted  erroneous information, or were unable to provide assistance on questions  about the status of our application. For example, one Lifeline provider told  us that our application was not accepted by the company because our  signature had eraser marks; however our application had been submitted  via an electronic form on the provider’s website and was not physically  signed. While our tests are illustrative and not representative of all Lifeline  providers or applications submitted, these results suggest that Lifeline  providers do not always properly verify eligibility and that applicants may  potentially encounter similar difficulties when applying for Lifeline benefits.  As described above, these challenges might be overcome if FCC  establishes a National Verifier, as it plans to do nationwide by the end of  2019, to remove responsibility for verifying eligibility from the providers.

FCC and USAC Have Taken Some Steps to Improve Oversight of Lifeline Providers, but Remaining Gaps Could Allow Noncompliance with Program Rules

FCC and USAC have implemented some mechanisms to enhance  oversight of Lifeline providers, as discussed in our May 2017 report, but  we found that remaining gaps could allow noncompliance with program  rules. For example, in July 2014, FCC took additional measures to  combat fraud, waste, and abuse by creating a strike force to investigate  violations of USF program rules and laws. According to FCC, the creation  of the strike force is part of the agency’s commitment to stopping fraud,  waste, and abuse and policing the integrity of USF programs and funds.  Similarly, in June 2015, FCC adopted a rule requiring Lifeline providers to  retain eligibility documentation used to qualify consumers for Lifeline  support to improve the auditability and enforcement of FCC rules.

However, we found FCC and USAC have limited oversight of Lifeline  provider operations and the internal controls used to manage those  operations. The current structure of the program relied throughout 2015  and 2016 on over 2,000 Eligible Telecommunication Carriers (ETC) to  provide Lifeline service to eligible beneficiaries. These companies are  relied on to not only provide telephone service, but also to create Lifeline  applications, train employees and subcontractors, and make eligibility  determinations for millions of applicants. USAC’s reliance on Lifeline  providers to determine eligibility and subsequently submit accurate and  factual invoices is a significant risk for allowing potentially improper  payments to occur, and under current reporting guidelines these  occurrences would likely go undetected and unreported. Federal internal  control standards state that management retains responsibility for the  performance and processes assigned to service organizations performing  operational functions. Consistent with internal control standards, FCC and  USAC would need to understand the extent to which a sample of these  internal controls are designed and implemented effectively to ensure  these controls are sufficient to address program risks and achieve the  program’s objectives.

We identified key Lifeline functions for which FCC and USAC had limited  visibility. For example, we found instances of Lifeline providers utilizing  domestic or foreign-operated call centers for Lifeline enrollment. When we  asked FCC officials about Lifeline providers that outsource program  functions to call centers, including those overseas, they told us that such  information is not tracked by FCC or USAC. With no visibility over these  call centers, FCC and USAC do not have a way to verify whether such  call centers comply with Lifeline rules. FCC and USAC have limited  knowledge about potentially adverse incentives that providers might offer  employees to enroll subscribers. For example, some Lifeline providers  pay commissions to third-party agents to enroll subscribers, creating a  financial incentive to enroll as many subscribers as possible. Companies  responsible for distributing Lifeline phones and service that use incentives  for employees to enroll subscribers for monetary benefit increase the  possibility of fictitious or ineligible individuals being enrolled into Lifeline.  Highlighting the extent of the potential risk for companies, in April 2016  FCC announced approximately $51 million in proposed fines against one  Lifeline provider, due to, among other things, its sales agents purposely  enrolling tens of thousands of ineligible and duplicate subscribers in  Lifeline using shared or improper eligibility documentation.

To test internal controls over employees associated with Lifeline for our  May 2017 report, we sought employment with a company that enrolls  individuals to Lifeline. We were hired by a company and were allowed to  enroll individuals in Lifeline without ever meeting any company  representatives, conducting an employment interview, or completing a  background check. After we were hired, we completed two fictitious  Lifeline applications as an employee of the company, successfully  enrolled both of these fictitious subscribers into Lifeline using fabricated  eligibility documentation, and received compensation for these  enrollments. The results of these tests are illustrative and cannot be  generalized to any other Lifeline provider. We plan to refer this company  for appropriate action as warranted. As stated above, these challenges  might be overcome if FCC establishes a National Verifier, as it plans to do  nationwide by the end of 2019, to remove responsibility for verifying  eligibility from the providers. In addition, in May 2017, we made two  recommendations to help address control weaknesses and related  program-integrity risks. Specifically, we recommended that FCC establish  time frames to evaluate compliance plans and develop instructions with  criteria for FCC reviewers how to evaluate these plans to meet Lifeline’s  program goals. We also recommended that FCC develop an enforcement  strategy that details what violations lead to penalties and apply this as  consistently as possible to all Lifeline providers to ensure consistent  enforcement of program violations. FCC generally agreed with these  recommendations.

In conclusion, Lifeline’s large and diffuse administrative structure creates  a complex internal control environment susceptible to significant risk of  fraud, waste, and abuse. FCC’s and USAC’s limited oversight of  important aspects of program operations further complicates the control  environment—heightening program risk. We are encouraged by FCC’s  recent steps to address weaknesses we identified, such as the 2016  order establishing a National Verifier, which, if implemented as planned,  could further help to address weaknesses in the eligibility-determination  process. We also plan to monitor the implementation status of the  recommendations we made in May 2017.

Chairman Johnson, Ranking Member McCaskill, and Members of the  Committee, this concludes my prepared remarks. I would be happy to  answer any questions that you may have at this time.

For further information regarding this testimony, please contact Seto J.  Bagdoyan at (202) 512-6722 or bagdoyans@gao.gov. In addition, contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this statement. Individuals who made key  contributions to this testimony are Dave Bruno (Assistant Director), Scott  Clayton (Analyst-in-Charge), and Daniel Silva.

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