October 25, 2013 2:07 PM

Part 3. Lifeline Reform: How'sThat Working Out for You?

In the last post, we talked about the generally uncivil and unproductive tenor of current arguments over the Lifeline program.  I've already mentioned that I would have liked the FCC to have taken a more holistic "once and for all" approach to modernizing the Lifeline program.  The Commission's decision was a mistake for at least two reasons.  

First, by deciding to ignore some of the seismic changes in the telecommunications market since the original Lifeline rules were adopted, including the shift from monopoly to competition and consumers' enthusiasm for wireless, the Commission left itself with very few options for "reform" and "modernization." In fact, by failing to undertake any reforms based on the structure of the modern telecommunications market, the Commission pretty much forfeited any claim to Lifeline "modernization."

The second reason the FCC made a mistake by not taking a comprehensive evaluation of the Lifeline program when crafting program reforms is that the FCC left itself with fewer chances to succeed.  In other words, by focusing exclusively on reforming carrier and consumer practices in order to prevent duplicate and ineligible disbursements, the FCC "doubled down" on its theory that waste and fraud were the primary cause of the $1.3 billion increase in the Lifeline program between 2007-2012. Here at p. 2

So, did the FCC win the bet?  Well, the Lifeline Reforms have been in effect for almost a year and a half, and yet the political acrimony over the size and administration of the fund has only escalated. What do you think?

The Lifeline Reform Rules

As we noted, the primary focus of the new Lifeline rules is to eliminate waste, fraud and duplication in the program.  Unfortunately, this burden was transferred squarely to service providers.  As a result of the new rules, carriers now have the responsibility to confirm eligibility of applicants, keep better records to help eliminate intra-company duplicates, and to educate applicants about the consumers' duties under the program. In other words, carriers got a lot more risk and no more resources to manage that risk.

One big change on the near horizon that could result in some measurable efficiency improvements to the fund is the duplicates database.  As we saw with the NALs recently announced by the FCC, data entry and record-keeping errors can always result in some (relatively small) number of duplicate claims within the same company.  However, the largest amount of duplicates result from the same customer getting service from multiple providers.  

For example, let's say the customer has been receiving wireline Lifeline service for a long time from one carrier, then perhaps another member of the subscriber's household signs up for wireless Lifeline service from a different carrier.  The error could be inadvertent, but today it doesn't get caught unless or until USAC goes through a study area with a lot of in-depth validation (IDV) audits and then compares subscriber lists between carriers.

When the database gets up and running, all of these duplicates will get identified and eliminated in every study area before they result in duplicate recovery from the fund--and without a lot of intensive audit work by USAC.  This will reduce the size of the fund.  But, what about the other reforms?

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The most significant reform so far, in terms of controlling fund size, has been the requirement that Lifeline providers re-certify their entire customer bases each year.  For 2012 the Lifeline fund disbursed $2,190 million.  For 2013, the fund is expected to disburse $1,812.  See here at p. 25. So, savings over the past year resulted in around $378 million.  

Still, this year was the first year of mandatory re-certifications, and many customers had not had contact with their service provider in quite some time leading up to this year's re-certifications. It is doubtful that next year's re-certifications will remove anywhere near this number of customers from the fund.  Without this significant one-off reduction in the size of the fund, how much has the fund benefited from the new rules?

While we've said that the total amount of duplicate reimbursements received by the five carriers in the NALs was a total of $73, 250, the total amount of overpayments received by these carriers was likely much higher.  In fact, I would guess that the main reason the level of fines was so high, relative to the overpayments alleged, is because the carriers in the NALs chose not to settle.  If these carriers had settled with the EB, they would have had to pay the fund back all of the overpayments received throughout the carriers' service territory for the previous 12 months. 

If we make the wildly optimistic assumption that each firm with an NAL over-recovered $500,000--and had settled with the EB--the total amount the fund would have saved since the Lifeline Reform Rules went into effect would have been--at most--$3 million (the 5 NALs plus 2 settlements earlier this year).  To be fair to the FCC, though, I know that USAC also engages in a lot of "ordinary" recovery through its frequent audits.  However, I have not been able to find the amount of their audit recoveries.  Thus, let's be super conservative, and estimate that the Lifeline Reform Rules (through USAC audits and FCC enforcement) save the fund about $10 million/year (out of a $1,812 million fund this year).

In our final installation of this series, we'll look at what the FCC should have done in its NPRM if it wanted to comprehensively reform Lifeline.  We'll also look at the savings the fund could have reaped if the FCC had made even a tiny effort to holistically reform Lifeline.

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