Telecommunications: Additional Action Needed to Address Significant Risks in FCC's Lifeline Program
Published: 2017-05-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Created in the mid-1980s, FCC's Lifeline 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. In 2016, Lifeline disbursed about $1.5 billion in subsidies to 12.3 million households.
In 2010, GAO found Lifeline had limited abilities to detect and prevent ineligible subscribers from enrolling. FCC adopted a reform order in 2012 to enhance Lifeline's internal controls. GAO was asked to examine FCC's reforms. This report discusses, among other objectives, (1) the extent to which Lifeline demonstrates effective performance towards program goals, and (2) steps FCC and USAC have taken to enhance controls over finances, subscribers, and providers, and any weaknesses that might remain.
GAO analyzed documents and interviewed officials from FCC and USAC. GAO analyzed subscriber data from 2014 and performed undercover tests to identify potential improper payment vulnerabilities. The results of GAO's analysis and testing are illustrative, not generalizable.
section_title: What GAO Found
paragraphs: 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, but has recently taken steps to do so. Lifeline participation rates are low compared to the percentage of low-income households that pay for telephone service, and broadband adoption rates have increased for the low-income population even without a Lifeline subsidy. 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 July 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 Lifeline—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 and related programs. To enhance the program's ability to detect and prevent ineligible subscribers from enrolling, FCC oversaw completion in 2014 of a database with a real-time list of subscribers to assist carriers in identifying and preventing duplicate subscribers. Additionally, 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, 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. Based on 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 2019 to determine subscriber eligibility. Further, FCC maintains the Universal Service Fund (USF)—with net assets exceeding $9 billion, as of September 2016—outside the Department of the Treasury in a private bank account. In 2005, GAO reported that FCC should reconsider this arrangement given the USF consists of federal funds. In addition to addressing any risks associated with having the funds outside the Treasury, where they do not enjoy the same rigorous management practices and regulatory safeguards as other federal programs, FCC identified potential benefits of moving the funds. For example, by having the funds in the Treasury, USF payments could be used to offset other federal debts, and would provide USAC with 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.
section_title: What GAO Recommends
paragraphs: GAO makes seven recommendations, which FCC generally agreed with, including that FCC take action to ensure the preliminary plans to transfer the USF from a private bank to the U.S. Treasury are finalized and implemented expeditiously.

section_title: Letter
paragraphs: 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. The Federal  Communications Commission (FCC) carries out this policy through four  programs, including the Lifeline program (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 4th 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 and the  Supplemental Nutrition Assistance Program (SNAP). After subscribers are enrolled in the Lifeline program, 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.
Subsequent to our 2010 report, which found that Lifeline had limited  abilities to detect and prevent ineligible and duplicate subscribers from  enrolling in the program, FCC adopted a Lifeline Reform Order in January  2012 (2012 Reform Order) to comprehensively reform, modernize, and  improve Lifeline’s internal controls. Specifically, the National Lifeline  Accountability Database (NLAD) was established as Lifeline’s first  enrollment database. The database contains information provided by the  subscriber during enrollment, including the subscriber’s full name,  residential address, date of birth, partial Social Security number (SSN);   qualifying eligibility program, and name of the Lifeline provider offering  service. In March 2015, we reported on the status of reform efforts and  the extent to which FCC had evaluated Lifeline, among other things, and  we recommended that FCC evaluate the program to determine the extent  to which it is efficiently and effectively reaching its performance goals.  FCC agreed with the recommendation.
You asked us to examine FCC’s reforms of Lifeline. This report 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 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.
To determine the extent to which the Lifeline program demonstrates  effective performance towards program goals, we reviewed documents  and interviewed multiple stakeholders associated with Lifeline, including  FCC, FCC’s Office of Inspector General (OIG), and USAC, among others.
To determine the steps taken by FCC and USAC to improve financial  controls in place for Lifeline and USF, and any remaining weaknesses  that might exist, we examined USAC financial data, including USF bank  account statements and payment data, and interviewed USF account  managers at the bank that holds USF funding. We also reviewed internal  financial controls established by FCC and USAC, among other things.
To evaluate the steps FCC and USAC have taken to improve subscriber  eligibility verification, and any remaining weaknesses that might exist, we  performed data matching and analysis to identify potential improper  payments using Lifeline’s (NLAD) and other beneficiary databases. The  results of the data analysis are illustrative rather than generalizable. We  began our data analysis in November 2014, and a snapshot of NLAD  data from that same period was used as the primary database to match  against other qualifying programs’ eligibility databases to confirm the  subscriber was eligible for Lifeline at the time the subscriber was  enrolled. We also matched NLAD data against the Social Security  Administration’s Death Master File to identify beneficiaries registered as  deceased who were potentially receiving Lifeline payments. In addition,  we performed data tests to identify other potential improper payments,  such as duplicate payments made to the same address. We conducted  data-reliability assessments of each database by reviewing  documentation and examining the data for anomalies, among other  things, and found they were sufficiently reliable for our purposes. The  results of our data matching apply only to the NLAD and specific state  and federal program databases that we examined; they cannot be  extrapolated to other states, programs, or periods.
To determine the steps FCC and USAC have taken to improve oversight  of Lifeline providers, and any remaining weaknesses that exist, we  analyzed FCC and USAC audits of Lifeline providers and resulting legal  enforcement proceedings, and met with several stakeholders, including  the FCC OIG and USAC’s Internal Audit Division. We also analyzed  USACs whistleblower and consumer complaint logs.
In assessing the steps taken to improve eligibility verification and provide  oversight, 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. See appendix I for more details  on our scope and methodology.
We conducted this performance audit from June 2014 to May 2017 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. We conducted our related  investigative work in accordance with investigative standards prescribed  by the Council of the Inspectors General on Integrity and Efficiency.
subsections: section_title: Background
subsections: section_title: History of the Lifeline Program
paragraphs: The idea that communication services should be available “so far as  possible, to all the people of the United States” has been a goal of  telecommunications regulation since Congress enacted the  Communications Act of 1934. In particular, although Lifeline was  created in the mid-1980s to promote wireline telephone subscribership  among low-income households, Congress codified the nation’s  commitment to universal service and made significant changes to  universal service policy through the Telecommunications Act of 1996  (1996 Act). The 1996 Act provided explicit statutory support for federal  universal service policy and directed FCC to establish a Federal-State  Joint Board on Universal Service to make recommendations to FCC on  implementing universal service provisions of the 1996 Act. The 1996 Act  also described universal service as an evolving level of  telecommunications services the FCC should periodically review, taking  into account advances in telecommunications and information  technologies and services.
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. The qualifying programs  include Medicaid; SNAP; Supplemental Security Income (SSI); Federal  Public Housing Assistance (Section 8); Veterans Pension and Survivors  Benefit; or tribal programs for those living on federally recognized tribal  lands. Residents of tribal lands may be eligible through additional tribal  programs.
Since the passage of the 1996 Act, FCC has taken actions aimed at  increasing participation in Lifeline. For example, initially to be a Lifeline  provider, a telecommunications carrier had to use its own facilities or a  combination of its own facilities and resale of another carrier’s service.  However, in 2005, FCC granted one carrier forbearance from that  requirement. Then, in 2008, FCC approved that carrier, a non-facilities- based, wireless provider, for the limited purpose of providing Lifeline  service, which paved the way for other non-facilities-based wireless  carriers to offer wireless service. After this approval, participation in  Lifeline began to increase significantly. From mid-2008 to mid-2012,  Lifeline enrollment increased from 6.8 million households to 18.1 million  households, a 166 percent increase. In addition, annual disbursements  increased from $820 million in 2008 to $2.2 billion in 2012, a 167 percent  increase.
In November 1998, FCC changed the universal service structure in  response to legal concerns raised by GAO about FCC’s authority to  create two independent corporations and Congress’s directive that a  single entity administer universal service support. FCC appointed an  existing body, USAC, as the permanent administrator of the program and directed the Schools and Library Corporation and the Rural Health Care  Corporation to merge with USAC by January 1, 1999. Prior to appointing  USAC as the administrator of all universal service programs, FCC  prepared and submitted a report to Congress in response to  congressional conference committee directions, proposing that USAC  would serve in this capacity.
While Lifeline participation and disbursements increased rapidly from  fiscal year 2008 through mid-2012, both disbursements and participation  declined after FCC began implementing the 2012 Reform Order in mid- 2012. As mentioned earlier, FCC adopted the 2012 Reform Order to  strengthen internal controls, improve accountability, and explore the  inclusion of broadband in the program through a pilot program. To reduce  the number of ineligible subscribers in the program, the 2012 Reform  Order adopted measures to check subscribers’ initial and ongoing  eligibility for Lifeline. The 2012 Reform Order required the creation of  NLAD and required Lifeline providers to query this enrollment database to  prevent duplicative enrollment.
From a 2012 peak of approximately 18.1 million Lifeline participants and  $2.2 billion in disbursements, FCC reported that disbursements fell by  nearly $40 million in 1 month after the eligibility verification requirements  went into effect in June 2012. In the 4th quarter of calendar year 2016,  Lifeline participation declined to approximately 12.3 million households,  while disbursements declined to approximately $1.5 billion for the year.  Figure 1 below shows Lifeline disbursements and participation from 2008  to 2016.
section_title: USF Contributions and Lifeline Disbursements
paragraphs: The 1996 Act requires every telecommunications carrier providing  interstate and international telecommunications services to contribute to  federal universal service, unless exempted by FCC. According to the  act, these contributions, or fees, are to be equitable and  nondiscriminatory and are to be deposited into the USF. For calendar  year 2014, approximately 3,100 of 6,820 telecommunications providers  that filed their revenues paid USF fees.
The amount of contributions required from telecommunications carriers  are determined each quarter, when FCC calculates the contribution factor  based on the projected demands of the universal service programs and  the projected contribution base. USAC then bills contributors based on  this factor. As shown in figure 2, the USF contribution factor has  increased 217 percent (approximately 12 percentage points) since 2000.  In the 1st quarter of calendar year 2016, the USF contribution factor was  18.2 percent, but as of the 4th quarter had dropped slightly to 17.4  percent.
According to FCC’s 2012 Further Notice of Proposed Rulemaking  regarding the assessment and recovery of USF contributions, an impetus  for the increased USF contribution factor is the decrease in assessable  revenues. For example, competition in the interstate long-distance  market, growth of wireless service, and bundling of service packages has  led to decreases in assessable revenues. As the pool of contributors and  assessable revenues has declined over the years, the USF contribution  requirements for those remaining contributors has increased to cover the  costs of administering the universal service programs.
Carriers file projected revenue information on a quarterly basis, which is  used to calculate the contribution factor for the forthcoming quarter, and  carriers are then billed for contributions by USAC based on the quarterly  contribution factor. Carriers generally pass their USF fee obligation on to  their customers, typically in the form of a line item on their monthly  telephone bill. Carriers, thus are able to recover the cost of their  contributions to USAC on a monthly or quarterly basis using the money  collected from customers. USAC uses USF contributions to pay for the  universal service programs, including Lifeline.
Lifeline providers currently receive a subsidy of $9.25 for every nontribal  Lifeline customer that the Lifeline provider claims is enrolled in Lifeline  based on the monthly or quarterly forms they submit to USAC. While the  federal nontribal Lifeline subsidy amount per beneficiary is consistent  across all Lifeline providers, the services provided to the Lifeline  subscriber may vary depending on the state where the beneficiary lives  and service offerings of the Lifeline provider, as some states supplement  the federal Lifeline subsidy with state funds. According to FCC officials,  approximately 23 states currently offer additional funding for subscribers.  For example, Lifeline providers in California receive $13.75 per month in  addition to the $9.25 federal subsidy. As a result, some California Lifeline  providers are able to provide subscribers with unlimited voice minutes  and unlimited text messages, while subscribers receiving service from the  same Lifeline provider in another state are eligible for up to 350 free  minutes and unlimited text messages. In its 2016 Modernization Order,  the commission addressed this variation to some extent by adopting  minimum service standards for both voice and broadband services, to be implemented in a phased-in approach, which became effective in  December 2016. See figure 3 for how USF money typically flows to  support universal service programs, including Lifeline.
Pursuant to advice provided by the Office of Management and Budget  (OMB) in April 2000, FCC maintains USF funds outside of the U.S.  Treasury. The private bank that holds the USF provides banking  services for USAC, which includes annual investment management  services with fees of approximately $1.5 million per year as of December  2015. Funds collected in excess of USAC’s immediate requirements for  cash on hand for all universal service programs are invested in U.S.  Treasury securities. According to the most-recent financial reports, as of  September 2016, the USF account had approximately $9 billion in assets,  and, as of December 2015, Lifeline had approximately $80 million in  assets. As we described in previous work, the USF is a permanent  indefinite appropriation. While the Antideficiency Act applies to  appropriated funds, since 2004, Congress has exempted the USF from  the Antideficiency Act. The current exemption extends until December  31, 2017.
section_title: Lifeline Program Operations
paragraphs: FCC, USAC, and states, as well as Lifeline providers and their agents, all  have roles and responsibilities in Lifeline. At the federal level, FCC is  responsible for setting policy, making and interpreting rules, providing  oversight, and, in certain states, designating carriers as Eligible  Telecommunications Carriers (ETC)—which are companies eligible to  receive universal support funding, including Lifeline, and generally  referred to in this report as Lifeline providers. USAC manages the daily  operations of Lifeline, including collecting USF fees, disbursing payments,  auditing USF recipients and contributors, and reporting to FCC. At the  state level, public-utility commissions can increase the scope of Lifeline in  their states by contributing additional financial support to Lifeline  recipients. States can also play a role in Lifeline enrollment either by  accepting applicants directly or giving Lifeline providers access to  information on enrollment in programs that households use to qualify for  Lifeline for the purposes of verifying eligibility, since this information is  generally housed at the state level.
To receive Lifeline disbursements, carriers must be designated as ETCs  by state public-utility commissions or FCC. State public-utility  commissions have the primary responsibility for designating carriers as  ETCs; however, in a situation where the telecommunications carrier is not  subject to jurisdiction of a state commission, FCC may designate the  carrier as an ETC. ETCs participating as Lifeline providers are generally  responsible for verifying applicants’ eligibility for Lifeline, advertising the  availability of the program, submitting forms for reimbursement, and  making annual eligibility recertifications. As of the fourth quarter of 2016,  there were 2,079 ETCs. Figure 4 is a graphical representation of the  organizational structure and corresponding responsibilities of the different  parties involved in Lifeline program.
section_title: FCC Has Not Evaluated Lifeline’s Performance in Meeting Program Goals but Has Taken Recent Steps toward Evaluation
subsections: section_title: FCC Has Not Evaluated Lifeline’s Performance in Meeting Program Goals
paragraphs: FCC has called for program evaluations in the past 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 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, FCC officials told us that 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. Specifically, we reported  that, according to FCC officials, FCC had not evaluated the extent to  which Lifeline has contributed to the narrowing of the gap in penetration  rates (the percentage of households with telephone service) between low- income and non-low-income households, and at what cost. We, therefore,  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 2015 report also described the results of two studies that FCC  provided to us and that had evaluated the impact of Lifeline. These  studies suggested the program may be an inefficient and costly  mechanism to increase telephone subscribership. The conclusions of  both studies suggested that many low-income households would likely  subscribe to telephone service in the absence of the Lifeline subsidy. As  we reported in 2015, FCC officials stated that the structure of the program  made it difficult for the commission to determine causal connections  between the program and the number of individuals with telephone  access. In particular, FCC officials noted that because Lifeline has existed  since the 1980s, it is difficult to compare results from the program to  results in the absence of the program. We also noted in our 2015 report  that several factors may alter how many people sign up for Lifeline  benefits. For example, changes to income levels and prices have  increased the affordability of telephone service, and technological  improvements, such as mobility of service, have increased the value of  telephone service to households.
Our current work raises additional questions about Lifeline’s effectiveness  in meeting its program goals. Specifically:
Lifeline participation rates are low compared to the percentage of low- income households that pay for phone service. According to FCC, the  participation rate shows that millions of Lifeline-eligible households  are obtaining voice service without Lifeline. FCC’s most-recent  monitoring report estimated that in 2015 approximately 96 percent of  low-income households that would be eligible for Lifeline based on  income had phone service. However, it appears that the majority of  those low-income households are receiving phone service outside of  Lifeline. Specifically, USAC reports that there were at least 38.9  million households in the states and District of Columbia that were  eligible for Lifeline as of October 2015, and only 12.5 million, or 32  percent, were enrolled in the program. Additionally, FCC does 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, it is difficult for FCC to determine whether it is  achieving the 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. The 2016  Modernization Order cites a June 2015 report from the Pew Research  Center to show that there is a “digital divide” as low-income  consumers adopt broadband at rates well below the rest of the  country. However, that report also notes that the class-related gaps  have shrunk dramatically in 15 years, as the most pronounced growth  has come among those in lower-income households and those with  lower levels of educational attainment. More-recent analysis from the  Pew Research Center shows that after accounting for mobile data  services, the number of individuals without Internet service has  dropped from an estimated 48 percent in 2000 to 13 percent as of  May 2016. Telecommunications providers began to address the  “digital divide” in some capacity prior to the 2016 Modernization  Order’s effective date by offering their own low-cost Internet service to  low-income households. We found that at least two companies  operating in a total of at least 21 states have 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, TANF, or public housing. The offered rate of these providers’  own low-income broadband service of $10 per month, is 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.
section_title: FCC Has Recently Taken Steps towards Evaluating Lifeline
paragraphs: FCC has recently taken some steps toward evaluating Lifeline. In June  2015, FCC solicited comments from the general public, citing our 2015  recommendation for a program evaluation. Specifically, FCC asked  whether it should change or modify the program goals and whether it was  necessary to perform a program evaluation, and, if so, how to best  conduct such an evaluation for Lifeline. In the 2016 Lifeline Modernization  Order, which, among other things, revamped Lifeline to include  broadband service in addition to voice service, FCC revised program  goals to explicitly include affordability for both services. Also as part of  the 2016 order, FCC instructed USAC to hire an outside, independent,  third-party evaluator to complete a program evaluation of the 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.
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. Similarly, according to OMB guidance, it is incumbent upon  agencies to use resources on programs that have been rigorously  evaluated and determined to be effective, and to fix or eliminate those  programs that have not demonstrated results. 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. Although the potential for this risk is acknowledged by FCC in  its discussion of a previous expansion of Lifeline, when FCC previously  expanded Lifeline it did so without sufficiently adjusting program rules to  keep pace with the new technologies, the financial incentives, or the  subsequent growth in the program. Similarly, our 2015 report found that  when FCC expanded Lifeline to include wireless service without  quantifying or estimating the potential cost increases, it contributed to  significant increases in disbursements from 2008 to 2012. Therefore,  completing the program evaluation as planned, and as we recommended,  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.
section_title: Financial Controls Exist, with Others Planned, for the Lifeline Program, but Weaknesses Remain
paragraphs: 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 for moving USF funds currently held in a private bank  account to the U.S. Treasury and establishing a national eligibility verifier  (National Verifier) that Lifeline providers could use to determine the  eligibility of applicants seeking Lifeline service. Weaknesses remain,  however, 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.
subsections: section_title: FCC and USAC Have Established Financial Controls for Lifeline
paragraphs: USAC has established financial and management controls to obtain and  review information to carry out its responsibilities with regard to billing,  collection, and disbursement of funds for universal service programs,  including Lifeline. To that end, FCC and USAC developed a Service  Provider and Billed Identification Number and General Contact  Information Form (FCC Form 498) to collect required information, such as  service-provider name, study area code (SAC), tax identification number,  and contact information from all ETCs, including Lifeline providers. This  information serves as a key internal control for billing, collection, and  disbursement operations. For example, all carriers participating in Lifeline  are required to have a SAC, which is a unique company-specific six-digit  number that identifies a carrier in a specific geographic area (e.g., state or  territory), and to have a unique FCC Form 98 ID. USAC takes steps to  assign a SAC to ensure only valid Lifeline providers, new Lifeline  providers, or existing Lifeline providers that are beginning operations in a  new geographical area receive disbursements. According to USAC policy,  before a SAC is issued, USAC officials review the ETC designation order  and confirm with the state public service commission that the order is final  and valid. USAC policy states this review is generally accomplished by  locating the ETC designation order on the state public service  commission websites, but USAC may also contact the public service  commission directly with any questions about the order.
As part of our undercover work, we tested this authorized payment  internal control by submitting fictitious documentation to USAC posing  as a Lifeline provider seeking a SAC designation to begin enrolling  customers and collecting USF subsidies. The results of this test are  illustrative rather than generalizable. USAC appropriately rejected our  application and explained it was unable to confirm our ETC designation  with the state we claimed to have approved us on our fabricated  application. Moreover, USAC also noted that there was no record that  FCC approved our fictitious company to provide Lifeline service.
Once the SAC and FCC Form 98 ID are established and validated by  USAC, Lifeline providers can begin providing services to qualified  subscribers and seek reimbursement from USAC. Typically, Lifeline  providers file their claims to USAC on a monthly or quarterly basis, but  have as long as 1 year from the respective filing period to file a revised  claim. Currently, USAC calculates the amount owed to the Lifeline  provider based on the providers’ monthly or quarterly claims.
USAC enhanced some of its internal controls to help prevent improper or  potentially fraudulent payments as a result of potential risks we identified  during the course of our work. Specifically, on the basis of our  observations of how USAC enters and approves a Lifeline service  provider and processes payments, we identified internal control  weaknesses whereby a USAC employee could improperly use the system  to create fraudulent payments. On the basis of our descriptions, USAC  officials agreed that risks existed and indicated they would take steps to  mitigate these risks, as described below.
Employee creates a fraudulent SAC and generates a disbursement: A  policy exists to separate the roles of data entry and review among  USAC employees charged with administering Lifeline. However,  during our review we found a lack of controls that would separate  these two functions and provide oversight of data-entry actions. For  example, an employee could create a new SAC and then enter  contact information and banking information for the SAC. This action  would not create an automatic notification to a reviewer or supervisor.  As a result, a lone employee could create a SAC and request a  disbursement for the SAC. To enhance controls, USAC officials said  that, beginning in August 2015, reimbursement approvers began  pulling an independent report from their system for the new SACs  receiving disbursements for the first time and comparing it to the  supporting ETC-designation documentation obtained from an  individual who does not have access to enter new SACs into the  system.
Employee uses an existing SAC that is not currently receiving  disbursements to generate a disbursement: During our review we  found that a lone USAC employee could change the banking and  contact information associated with a SAC and then act as a reviewer  to approve the changes without a separate reviewer being  automatically notified. The employee could then request a  disbursement for the FCC Form 498 ID and have it deposited into a  different bank account. To enhance controls, USAC officials said that,  beginning in August 2015, the reimbursement approvers began  generating an independent report from the system for SACs that are  being paid with a prior FCC Form 497 entry of zero dollars, which  occurs when a company has not filed for 6 months and confirms it has  no subscribers, and reviewing the FCC Form 497 record to determine  whether there was any suspicious activity requiring further validation.
In addition, USAC officials told us they would update the user workflows  and permissions for employees as part of a development effort that  includes revisions to ETC filing procedures. According to USAC officials,  the updated workflow requires that new FCC Form 498 ID numbers  generated internally will be reviewed and approved by a member of the  Finance Management Team. According to USAC officials, these internal  user workflow changes were implemented in May 2016.
section_title: USAC’s Banking Practices for USF Result in Oversight and Accountability Risks, Which FCC Has Plans to Mitigate
paragraphs: FCC maintains USF funds—whose current net assets exceed $9 billion  according to the most recent financial reports (as of September 2016)— outside of the U.S. Treasury pursuant to 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 the  FCC should reconsider this determination in light of the status of universal  service monies as federal funds.
According to an internal memo from FCC’s Managing Director in  December 2014, OMB presented the FCC with a Fiscal Year 2016  Budget Passback, a memo outlining various goals and objectives relating  to USF reform, modernization, and oversight. The memo states that OMB  observed that USF funds are federal resources and should enjoy the  same rigorous management practices and regulatory safeguards as other  federal programs. According to correspondence received from the FCC  Chairman’s Senior Legal Counsel, as of March 2017, FCC has decided to  move the funds to the Treasury to address this situation. In addition to  addressing any risks associated with having the funds outside the  Treasury, FCC identified potential benefits of moving the funds. For  example, FCC explained that having the funds in the Treasury could allow  USF payments to be used to offset other federal debts, and would provide  USAC with better tools for fiscal management of the funds, including  access to real-time data and more accurate and transparent data.
To accomplish this move, the correspondence notes FCC has been  coordinating with the Treasury and OMB to obtain a better understanding  of obstacles involved with moving the money to the Treasury. FCC’s  Office of the Managing Director prepared a preliminary project plan for  moving the USF to the Treasury with the goal of completing the transfer in  approximately 1 year. If the USF were held in the Treasury, the  Secretary of the Treasury would have more cash on hand, which could  reduce the Treasury’s need to borrow cash and its associated borrowing  costs.
USAC Banking Arrangements  The Universal Service Administrative  Company (USAC) contract with the bank that  holds the Universal Service Fund (USF)  includes terms for the compensation owed for  services provided by the bank, bank-data  retention requirements, and confidentiality  agreements. For 2015, USAC paid the bank  annual investment fees of approximately $1.5  million.  A different bank provides banking services for  USAC’s administrative disbursements, such  as payroll services, but there is no contractual  arrangement between that bank and USAC.  Federal Communications Commission (FCC)  officials were unaware that USAC did not  have a contract in place until we raised the  matter with them in April 2015. Since 1999,  this bank has managed USAC’s  administrative disbursements—totaling  approximately $141 million in 2015—for an  annual cost of approximately $22,000.  According to FCC, fees paid to this bank are  funded by credits from the USF, which are 0.2  percent of average collected balances, and  there is not a minimum balance requirement,  therefore, there are no separate annual fees  paid to the bank. Regardless, there is no  contract in place stipulating the service  agreement, terms and conditions, or  associated costs. FCC officials told us they  were aware of the banking service, but that  not having a contract in place was an  oversight on the part of USAC and needs to  be remedied. After we raised this issue,  USAC solicited competitive proposals in  October 2016 for these banking services and  plans to put in place a contract to stipulate the  agreement.
According to FCC, until the USF is moved into the Treasury, there are  some oversight risks associated with holding the fund in a private  account. Although USF funds are held by a bank in the name “Universal  Service Administrative Company as Agent of the FCC for Administration  of the FCC’s Universal Service Fund,” the contract governing the account  does not provide the FCC with authority to direct bank activities with  respect to the funds in the event USAC ceases to be the administrator of  the USF. FCC officials told us that although FCC is not party to the bank  contract for USF, they reviewed the statement of work for the contract  and were involved in USAC’s procurement process. After we raised this  matter with FCC officials, beginning in November 2016, FCC sought to  amend the contract between USAC and the bank to enable the bank to  act on FCC instructions independent of USAC in the event USAC ceases  to be the administrator. However, as of May 2017, the amended contract  has not been signed.
While there is 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 and  under FCC’s preliminary plan it would not be until next year, at the  earliest, that the funds would be moved to the Treasury. Further, 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 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.
section_title: USAC Currently Uses a “Pay-and-Chase” Model of Oversight, but It Has Plans to Create a National Verifier to Determine Eligibility Prior to Enrollment
paragraphs: Currently, there are no uniform front-end eligibility checks available to  USAC to ensure Lifeline providers have accurately tallied the number of  subscribers for whom they seek reimbursement. As a result, USAC  primarily relies on a “pay-and-chase” model of oversight. “Pay-and-chase”  refers to making disbursements on the front end and relying on audits or  reviews after the funds have been disbursed to check for any  noncompliance or improper payments. According to USAC officials,  claims submitted by Lifeline providers are reviewed to help ensure  accuracy, and the risks of overpayments are minimized prior to  disbursement. However, these reviews are fairly limited. For example,  USAC officials told us they compare provider disbursements, perform a  trend analysis of disbursement amounts to search for suspicious claims,  and initiate additional reviews when a claim appears irregular or exceeds  a set rate of increase determined by USAC officials as potentially risky.  Additionally, USAC primarily relies on Payment Quality Assurance  Program (PQA) and Beneficiary and Contributor Audit Program (BCAP)  assessments—discussed later in this report—that occur after  disbursements have been made to detect fraud. While USAC’s payment- review processes may help minimize improper payments to some extent,  USAC does not confirm subscriber eligibility and therefore is limited in its  ability to know up front whether the Lifeline providers’ forms submitted for  payment are accurate and based on qualifying households receiving  Lifeline service. GAO’s Framework for Managing Fraud Risks in Federal  Programs states that, to the extent possible, agencies should conduct  data matching to verify key information, including self-reported data and  information necessary to determine eligibility, prior to enrollment to avoid  the “pay-and-chase” approach to risk management, which is typically a  less cost-effective use of resources.
To help determine eligibility prior to enrollment, FCC has plans to create a  third-party national eligibility verifier (National Verifier) to be launched  nationwide by the end of 2019. The National Verifier is expected to  interface with both state and federal eligibility databases to confirm  eligibility. Currently, USAC and FCC are working to sign data-sharing  agreements with state entities and federal agencies with relevant  eligibility-data sources. If effectively implemented, the National Verifier— discussed in more detail later in this report—could help ensure eligibility  verification and reduce the reliance on a pay-and-chase model of  oversight. However, on the basis of past experience, the feasibility of  creating data-sharing agreements that would enable an automated  means to confirm eligibility prior to disbursements is uncertain.  Specifically, the 2012 Reform Order set a goal for developing an  automated means for verifying Lifeline eligibility by the end of 2013, for, at  a minimum, SNAP, Medicaid, and SSI because these are the three most  common programs through which subscribers qualify for Lifeline. FCC  has not yet been able to create such an automated means. According to  FCC officials, there are challenges in creating a national eligibility  database as some states have privacy laws that prohibit sharing eligibility  data with the federal government. Moreover, data quality may vary from  state to state, or may not be maintained by the state for each Lifeline  qualifying program. Until progress is made with the National Verifier and  data-sharing agreements are put in place with state eligibility databases,  USAC will continue to primarily rely on a pay-and-chase approach to  detect fraud.
section_title: USAC Performed a Limited Number of USF Contribution Audits of Telecommunications Providers, but Plans to Increase Audit Coverage in Future Years
paragraphs: USAC performs USF contribution audits of telecommunications providers  as a financial management control. The number of audits issued from  January 2010 through December 2015 was limited; however, USAC plans  to increase its audit coverage in future years. USAC performs contribution  audits to ensure that telecommunications providers pay USF fees as  required to support the universal service programs. As previously  discussed, all telecommunications providers, with limited exceptions,  must pay a percentage of their interstate and international end-user  telecommunications revenues to support the USF. Among other things,  USAC contribution audits review documentation to verify that the revenue  reported by the telecommunications providers match actual revenues.  The contribution audits are also meant to confirm, among other things,  that telecommunications providers that opt to pass the cost of USF fees  to customers do not charge in excess of the relevant contribution factor  times the assessable portion of that customer’s bill.
From January 2010 through December 2015, USAC had issued  contribution audits on 74 telecommunications providers, with audit  periods from calendar year 2007 through 2013. During this 6-year period, the total number of telecommunications providers that filed  revenues with USAC each year ranged from about 6,000 to almost  6,700. (See table 1.)
The limited audit coverage of the reported USF contribution-based  revenue during this time frame is primarily the result of USAC not auditing  the larger USF contributors. For example, during the period we reviewed,  USAC audited 1 of the top 10 USF contributors and 2 of the top 30 USF  contributors for calendar year 2014. Of the 74 audits performed, 8 of  them were performed on telecommunications providers that reported $0  in assessable revenues. According to USAC officials, the reason the very  large companies are not routinely audited is due to the complexity of the  audits and limited audit resources.
According to USAC’s most recent 2016–2017 fiscal year audit plan, USF  contributions audits beginning in March 2016 used a targeted risk-based  approach, which includes the amount of assessable revenues and  whether the carrier has ever been audited, as opposed to randomly  selecting carriers, as had been done previously. Also, the officials said  that the percentage of audit coverage is expected to increase with the  current audit plan as external cosourced staff from external audit firms  were retained in March 2016 to help perform audits of higher-risk and  larger contributors. The current audit plan also estimates that  approximately 9 percent of the reported gross revenues from  telecommunications carriers will be covered in future audit years. If  effectively implemented, these changes should result in a significant  increase of risk-based audit coverage, and should help USAC better  assess compliance with USF contribution requirements for universal  service funding.
section_title: Most Audited Carriers Collected and Contributed Incorrect Amounts of USF Fees; FCC Has Initiated a Process for Following up on Overcharges
paragraphs: The findings for the 74 USF contributions audits we reviewed indicate that  most carriers were not reporting their assessable telecommunications  revenue appropriately. These audit findings raise questions not only  about the USF fees collected, but also the rate that was set by USAC.  Because the assessable telecommunications revenues reported by  audited carriers have been incorrect, the audits raise the possibility that  the USF rate-setting process was potentially based on inaccurate  information. In other words, the accuracy of the USF contribution factor is  limited as this calculation is partly based on reported telecommunications  revenues, which the limited number of audits demonstrate may be  reported incorrectly. Of the 74 contribution audits, USAC found that in 10  the carrier reported revenues correctly; in 48, USAC found the carrier  underreported assessable telecommunications revenue; and in 16, USAC  found that the carrier overreported assessable telecommunications  revenues—and thus may have overcollected USF fees from customers.
As part of the contribution audit, USAC also reviews a small sample of  customer phone bills to ensure that USF fees charged to customers are  not in excess of the relevant contribution factor times the assessable  portion of that customer’s bill as required by regulation. For 15 of the 16  USAC contribution audits that found the carrier overreported assessable  telecommunications revenue to USAC, the audit noted the carrier was  unable to be reimbursed because the 12-month time limit imposed by  FCC rule to refile had expired. If the carrier passed through USF fees, as  most do, it is likely that the customers were also not reimbursed. In some  instances, when USAC audits find that the company overreports  assessable revenue, but the limited sample testing of individual customer  bills do not indicate an overcharge has occurred, the audits do not  recommend or require that the company refund customers any USF fees  that were overcollected as a result of the incorrect revenue assessment.  The limited audit coverage combined with audit findings demonstrating  some carriers have paid into the USF incorrectly may suggest that USF  fees collected are not in the correct amount.
In our review of the 74 contribution audits, we also found that 60 of them  included tests to determine whether the carrier was in compliance with  the rules as they relate to USF recovery charges on end-user customer  invoices. We found that 27 of the 60 tests identified that the carrier  overcollected USF fees from some customers and 1 other could not  determine whether the carrier overcharged USF fees as the carrier did  not maintain documentation. The total amount of overcollection among  these audits was unknown because the findings were based on a small  sample of invoices reviewed and not the total population of potentially  overcharged customers.
According to USAC officials, typically when a telecommunications  provider overcharges USF fees, it is not limited to a few customers but  affects the entire customer base. For example, if a telecommunications  provider charges all of its customers the incorrect USF quarterly- contribution factor, it would likely affect all customers. When USAC finds  that USF fees were misapplied to a customer’s phone bill during the  contribution audit, USAC instructs the telecommunications provider to  comprehensively review all their phone bills to identify the universe of  improper USF fee charges and to reimburse those customers. However,  USAC told us that it is not responsible for determining how those  reimbursements should take place, as that is an FCC policy issue. As a  result, USAC does not follow up with telecommunications providers to  ensure they comprehensively review their phones bills or reimburse  overcharged customers, but instead refers the audits that find USF  overcharges to the FCC Enforcement Bureau.
Until recently, USAC and the FCC’s Enforcement Bureau had differing  views about what constituted a formal referral for enforcement action with  respect to USF overcharges. According to USAC, since January 2013 it  has submitted lists to FCC identifying telecommunications carriers with  potential USF fee overcharges based on completed contribution audits,  which included 16 identified carriers. FCC’s Enforcement Bureau  officials told us that the lists alone were not considered by them as  referrals or recommendations for enforcement action, but rather as  general information that may support investigations. According to the  Enforcement Bureau officials, the primary referral process used for USF  enforcement actions is through letters submitted by USAC, which  specifically identify matters to be considered for enforcement action. In  contrast, USAC officials told us it was their understanding that the listings  of contributor audits that found customers were overcharged USF fees  would be considered referrals for follow-up and potential enforcement  actions. According to the Enforcement Bureau, 1 of the 16 contributors  that was listed is under investigation and 2 others were considered for  enforcement action, but, on the basis of available enforcement resources,  the age of the alleged overcharges, and the potential severity of the  violations, the Enforcement Bureau determined no further action was  warranted for these 2 cases.
In our review of the 74 contribution audits, we identified an additional 11  companies that overcharged USF fees to customers that were not  included in the list of 16 audits that USAC provided to FCC’s Enforcement  Bureau, totaling 27 audits that found USF overcharges to customers.  USAC officials told us 8 of the 11 instances of overcharging USF fees  were not forwarded to FCC because they occurred prior to 2013, which is  when FCC and USAC established a policy to forward such audit findings  to the FCC. Two of the audits were not on the list because they were  approved by the USAC Board of Directors after our request for the list of  audits that found USF overcharges. USAC officials confirmed those two  audits were later provided to FCC. One audit was not provided, but USAC  officials told us they will include that audit in their next report to FCC’s  Enforcement Bureau. Thus, there was no audit follow-up or enforcement  actions taken for 24 of the 27 audits in which USAC found the carrier was  overcharging USF fees to customers during the 2007–2013 audit period  time frame, and it is not known whether the carrier comprehensively  reviewed phone bills across its customer base to identify all overcharges,  or whether overcharged customers were ever reimbursed and whether  overcharges stopped.
The lack of agreement as to what constitutes a referral to follow up on  USF overcharges created some risk that FCC’s Enforcement Bureau  would not take action to review and ensure customers are reimbursed  and any overcharges stop. However, as a result of our inquiries regarding  the status of these referrals, FCC officials told us they initiated a new  referral process. According to FCC officials, since December 2015, all  FCC referrals are routed to a central point of contact, as opposed to  individuals, within FCC’s Enforcement Bureau using a standardized e- mail address. According to FCC officials, this revised process will better  ensure that all referrals are reviewed by a central point of contact and  routed to the appropriate point of contact for follow-up if necessary.
section_title: FCC Adopted a Budget Mechanism for Lifeline, but Its Effectiveness in Controlling Expenditures Is Potentially Limited
paragraphs: With the March 2016 Modernization Order, FCC established a budget  mechanism for Lifeline for the first time, setting the budget at $2.25  billion. According to FCC, it was mindful of concerns that establishing a  budget on Lifeline could lead to eligible consumers being denied service.  Yet, partly because it decided to expand Lifeline to include broadband,  FCC stated that it had concluded that its budget mechanism would  ensure the financial stability of the program and help guarantee access to  all eligible consumers. It also stated that establishing the budget  mechanism would balance the need to ensure that Lifeline continued to  reduce the contribution burden on the nations’ ratepayers and continue to  support service to eligible consumers. According to the March 2016 order,  FCC set the budget at $2.25 billion by considering current participation  rates, possible growth of the program as a result of the expansion to  broadband, and the safeguards already in place to reduce waste, fraud,  and abuse. According to GAO’s Cost Estimating and Assessment  Guide, a reasonable and supportable budget is essential to a program’s  efficient and timely execution.
However, the 2016 Modernization Order does not require the FCC  Commissioners to take any immediate action to control expenditures if  the budget is exceeded. Instead, the order requires a bureau within FCC  to issue a report to FCC Commissioners by July of the following year if  total Lifeline disbursements exceeded 90 percent of the budget in the  previous calendar year. The order states that the Commissioners are  expected to take action in response to the report within a 6-month time  frame. No requirements are outlined stipulating that the budget must be  reapproved by the Commissioners if additional funds are needed to meet  program demands.
Thus, if costs were to overrun 90 percent of the budget, it could be a year  or longer before the commission could take any actions according to the  time frame outlined in the order, raising questions about the timing,  efficacy, and ability of the budget to control expenditures. Without  requiring the Commissioners to review and approve additional spending  in a timely manner, substantial increases in demand like those that the  program has experienced in the past could lead to expenditures beyond  those that FCC budgeted. In such a case, the budget would have limited  effect in controlling program costs.
section_title: USAC Audit Reviews of FCC Truth-in-Billing Rules Are Limited
paragraphs: When telecommunication carriers opt to bill customers with a USF line- item charge, a customer may not be able to identify what line item  accounts for the USF charge. FCC’s Truth-in-Billing rules apply when  providers pass through USF line-item charges to customers. These rules  are intended to improve consumers’ understanding of their telephone bills  and to help consumers detect and prevent unauthorized charges. While  FCC has not adopted any particular language to specify how USF  charges are to be labeled on a bill, the rules require that a telephone  company’s bill must provide a brief, clear, nonmisleading, plain-language  description of the service or services rendered to accompany each  charge, and contain full and nonmisleading descriptions of charges,  among other things. According to USAC officials, a customer may not be  able to identify what line items account for the USF charge. For example,  several USAC officials we spoke with were unable to determine what line  items accounted for USF pass-through charges when reviewing their own  phone bills. Similarly, FCC’s own phone bill did not clearly specify the line  item reflecting the USF pass-through charge, but instead referred to  “regulatory pass-through charges.” FCC officials were not able to  determine whether this line item represented USF charges during our  meeting, but they told us they confirmed with their telecommunications  provider after the meeting that this line item represented USF charges.
According to USAC officials, their contribution audits do not determine  whether companies comply with the Truth-in-Billing rules with regard to  the labeling of USF fees as this is considered outside the scope of their  audits. Instead, according to USAC’s review officials, audits of customers’  bills as part of contribution audits are focused on ensuring carriers do not  overcharge USF fees to customers beyond the assessable contribution  rate, and this is made possible through detailed meetings with the  telecommunications provider that take place during the audit. However,  even though FCC has not adopted any particular language to specify how  USF charges are to be labeled, USAC could assess whether there is a  brief, clear, nonmisleading, plain-language description of the service or  services rendered to accompany each charge. Without including in their  audit reports instances where they cannot identify the USF charge—for  those carriers that opt to pass through USF charges in a separate line  item—carriers may lack the impetus to enhance the transparency of their  bills, and their customers will remain unable to detect and prevent  potentially unauthorized charges.
section_title: FCC Has Not Yet Provided USAC Guidance about USF Contribution Requirements, Which Can Result in Inconsistent USF Contributions
paragraphs: USAC has requested guidance from FCC pertaining to USF contribution  requirements, but the guidance is still pending. Specifically, in August,  2009 USAC sought guidance on whether various revenues derived from  new technologies require USF fees, including whether Virtual Private  Network (VPN) and dedicated Internet Protocol revenue should be  classified as a telecommunication service, and thus subject to USF fees.  Similarly, in April 2011 USAC submitted a request to FCC for guidance to  determine whether text messaging revenue is subject to USF fees. Both  of these items remain pending. In April 2012, FCC adopted a Further  Notice of Proposed Rulemaking regarding reform of the contributions  system. The notice sought public comment on various measures to  reform and modernize the USF contribution system, including who should  contribute, how contributions should be assessed, improvements to the  administration of the contributions system, and recovery of universal  service contributions from consumers. This rulemaking remains pending.  Additionally, in August 2014 FCC sought a recommendation from the  Federal-State Joint Board on Universal Service regarding modifications  of the universal service contribution methodology and referred the  rulemaking record from the April 2012 notice to the joint board for its  consideration. The joint board’s decision also remains pending, but per  FCC officials, may address some of the issues on which USAC has  requested guidance.
FCC is required to ensure that telecommunications carriers that provide  interstate telecommunications services pay USF fees, on an equitable  and nondiscriminatory basis, to the specific, predictable, and sufficient  mechanisms established by FCC to preserve and advance universal  service. In addition, according to Standards for Internal Control in the  Federal Government, management should internally communicate the  necessary quality information to achieve the entity’s objectives. Per  FCC regulations, its Wireline Competition Bureau is required to take  action in response to requests for reviews of decisions of the USF  Administrator within 90 days, with the option to extend the response time  an additional 90 days, but there is no requirement regarding the timing of  action on requests for guidance from the USF Administrator. FCC officials  told us the reasons for the significant delays are varied. For example,  FCC officials told us that some guidance requests such as these from  USAC are very complicated and require the full commission’s input, which  can take a long time as the FCC has other competing priorities.
Without guidance on contribution requirements, some carriers collect  more from customers and pay more into the fund than other carriers for  the same service. For example, our review of the 74 contribution audits  found 14 instances whereby a carrier classified texting or VPN revenues,  or both, as assessable USF revenues. One audit, issued in March 2011  found the carrier reported $117 million dollars in VPN revenues as  telecommunications revenues assessable to USF contributions.  According to USAC, because of the carrier’s decision to classify VPN  revenue as a telecommunication service, the carrier may have passed  through approximately $3.9 million in USF fees to customers. In  comparison, another audit found a company that classified $86 million in  text revenue as nontelecommunications revenue and therefore not  assessable for USF contributions. According to USAC, the carrier  reported approximately 88 percent of its mobile services as  nonassessable, therefore approximately $1.4 million in USF fees were  forgone and not collected from customers to fund universal service  programs. By responding to USAC requests for guidance, FCC could help  ensure that the contribution factor is based on complete information and  that USF pass-through charges are equitable.
section_title: FCC and USAC Have Implemented Some Controls to Improve Subscriber Eligibility Verification, but Weaknesses Remain
paragraphs: Although FCC and USAC have implemented controls to improve  subscriber eligibility verification, such as implementing the NLAD  database in 2014, our analysis of data from 2014, including undercover  attempts to obtain Lifeline service, revealed significant weaknesses in  subscriber eligibility verification. Subsequently, USAC took steps to  enhance the accuracy of the NLAD database. Lifeline providers are  generally responsible for verifying the eligibility of potential subscribers,  but their ability to do so is hindered by a lack of access to, or awareness  of, state eligibility databases. These challenges might be overcome if  USAC provided additional information to providers about those databases  and if FCC establishes a National Verifier, as it plans to do by 2020, to  remove responsibility for verifying eligibility from the providers.
subsections: section_title: FCC and USAC Have Implemented Some Controls to Improve Subscriber Eligibility Verification
paragraphs: USAC has implemented some controls to screen for subscribers  attempting to receive duplicate Lifeline benefits, and for applicants  attempting to enroll in the program using fictitious identities and  addresses, and to verify whether subscribers are still eligible for Lifeline.  These controls have reduced the number of subscribers and households  receiving duplicate benefits both within the same Lifeline provider and  subscribers receiving duplicate benefits across Lifeline providers.  Specifically, in 2012, FCC directed USAC to develop NLAD to keep track  of all subscribers within Lifeline and to verify that subscribers are not  already receiving Lifeline service from a different Lifeline provider. Also in  2012, FCC began requiring the annual recertification of all subscribers’  eligibility. Lifeline providers or, if applicable, state Lifeline administrators  are required to recertify that their subscribers are still eligible for Lifeline  beginning the calendar year after each subscriber is enrolled.
The NLAD database was completely implemented by March 2014 and  contains a real-time list of Lifeline beneficiaries to assist carriers in  identifying and preventing duplicate subscribers.
Prior to NLAD, because Lifeline providers were unable to view each  other’s subscriber lists, they could not detect subscribers receiving  duplicate benefits across providers. Currently, when Lifeline providers  enroll individuals in the program, the NLAD database automatically  checks for potentially duplicative benefits within and among Lifeline  providers.
In addition, since NLAD went online the database has utilized a Third  Party Identity Verification (TPIV) process and an address validation  control to verify applicants’ identities and addresses when their  information is entered into NLAD. The TPIV process verifies the identity of  an applicant by matching the applicant’s first name, last name, date of  birth, and the last four digits of his or her Social Security number (SSN)  against official records. The address validation control process checks  applicants’ addresses against U.S. Postal Service data. Applicants who  fail TPIV or address validation controls are subject to a dispute resolution  process whereby subscribers can provide additional documentation to  confirm their identity or documentation confirming their address is  deliverable. If NLAD identifies the applicant as a potential duplicate  subscriber, or the identity and address cannot be confirmed, the provider  will not be able to register the applicant in NLAD.
section_title: Our Analysis of 2014 Eligibility Data Suggests Significant Weaknesses in Subscriber Eligibility Verification
paragraphs: 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 SSI using NLAD data as of  November 2014. We focused our analysis on these three programs  because FCC reported in 2012 that these are the three qualifying  programs through which most subscribers qualify for Lifeline. Because  SNAP and Medicaid data are maintained at the state level, we selected  five states to test Lifeline beneficiaries’ participation in SNAP and six  states to test their participation in Medicaid. We tested SSI eligibility  across the 46 states and the District of Columbia whose Lifeline providers  utilize NLAD. We compared the approximately 3.4 million subscribers  that, 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.
Prior to our analysis of NLAD data, we conducted reliability testing  including examining the data for anomalies such as last four SSN digits  that were all zeroes and out-of-scope or dates of birth based on a  comparison to the Lifeline enrollment date. We also tested NLAD for  complete duplicate records containing the same subscriber name, last  four SSN digits, and date of birth. On the basis of our discussions,  documentation review, and our own testing of the data, we concluded that  the data fields used for this report were sufficiently reliable for the  purpose of our review, but that the potential for significant data-entry  errors in NLAD remains. Further, it is not possible to determine from data matching alone whether these matches definitively identify recipients  who were not eligible for Lifeline benefits without reviewing the facts and  circumstances of each case. For example, we could not identify based on  the data alone whether there were data-entry errors at the time of  enrollment incorrectly stating the qualifying Lifeline program presented by  the subscriber at the time of Lifeline enrollment.
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.  According to NLAD, the number of subscribers participating in these  programs in the states selected for our analysis was 3,474,672, or 33  percent, of the 10,589,244 unique subscribers we identified. In total, we  were unable to confirm whether 1,234,929 individuals out of the  3,474,672 that we reviewed, or 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 these  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 to FCC and USAC for appropriate action as warranted.
Figure 5 below shows the percentage of Lifeline subscribers (that claimed  either Medicaid or SNAP as eligibility to qualify for Lifeline) we were  unable to confirm as eligible using state Medicaid and state SNAP  eligibility data for selected case-study states. The results of our analysis  for Georgia also include the percentage of Lifeline beneficiaries we were  unable to confirm as eligible who were validated by the state eligibility  database, as Georgia’s state database only confirmed eligibility for  Medicaid and SNAP at the time of our analysis.
Figure 6 is an interactive graphic that shows the percentage of Lifeline  beneficiaries (that claimed eligibility via SSI to qualify for Lifeline) that we  were able to confirm as likely eligible and that we were unable to confirm  as likely eligible using nationwide SSI eligibility data for states that  participate in NLAD. See appendix II for more information.
We also conducted analysis of NLAD to identify instances of subscribers  receiving duplicate Lifeline benefits and deceased individuals appearing  as active beneficiaries. The results of our analysis are as follows:
We found a total of 5,510 potential internal duplicates whereby the  last name, first name, date of birth, and last four digits of the SSN of  one record matched another record exactly. The subsidy amount  associated with these duplicates equaled approximately $51,000 per  month, or $612,000 annually.
We matched NLAD enrollment data with SSA’s Death Master File and  identified 6,378 individuals reported as deceased who are receiving  Lifeline benefits. These individuals either were enrolled, recertified,  or both after they had been reported dead. The date of death for each  of these individuals preceded the Lifeline enrollment or recertification  date by at least 1 year. The subsidy amount associated with these  individuals equaled $58,997 monthly and $707,958 annually.  According to USAC, the NLAD recertification date field is not  completely populated; therefore, these numbers likely understate the  number of people reported dead who were reenrolled in Lifeline.
The results of our analysis show that a potential annual subsidy amount  of $1.2 million could have resulted from potentially ineligible or fictitious  individuals receiving Lifeline benefits if these individuals were not  deenrolled by USAC or Lifeline providers and the providers claimed  reimbursement for these subscribers.
At the time USAC provided the NLAD data to us in November 2014,  USAC officials stated that they were performing a number of procedures  on the initial data loaded into NLAD by providers. According to USAC  officials, from September through December 2014 Lifeline providers were  required to collect Independent Economic Household worksheets from all  subscribers who were found to share the same address with another  Lifeline subscriber. USAC officials informed us that if no such completed  worksheet was obtained, or if the subscriber did not certify he or she was  part of a different household from another subscriber sharing the same  address, the subscriber was deenrolled. USAC reported that this process  deenrolled approximately 1.3 million subscribers, some of whom could  still have been in the data we reviewed. We did not remove these  subscribers when we conducted our data analysis, because duplicate  addresses are allowed if individuals are part of a separate economic  household. USAC performed additional work to collect Independent  Economic Household worksheets before determining whether subscribers  should be deenrolled.
USAC officials also informed us that additional rigor was added to NLAD’s  duplicate-checking algorithm in March 2015. Specifically, USAC officials  explained that a process to scrub NLAD records to identify additional  duplicates was completed in May 2015, and resulted in the deenrollment  of approximately 374,000 subscribers. We estimate that USAC’s work to  identify and scrub duplicates was performed on over 10 million  subscribers, while our analysis was limited to our case-study states for  Medicaid and SNAP and the national population of SSI recipients. As  USAC had not completed its process of identifying and deenrolling  duplicate subscribers when we obtained NLAD data, there may be some  overlap between the subscribers deenrolled by USAC and the 3.4 million  subscribers included in our analysis. However, we removed internal  duplicates in NLAD whereby the last name, first name, date of birth, and  last four digits of the SSN of one record matched another record exactly  before performing any data matching, so the likelihood of any overlap in  duplicate subscribers has been reduced. Our analysis also involved  matching NLAD data to qualifying Lifeline program data, which FCC or  USAC have not done.
section_title: Undercover Attempts to Obtain Lifeline Service Illustrate Beneficiary Verification Weaknesses
paragraphs: Our undercover testing found that Lifeline may be vulnerable to ineligible  subscribers obtaining service and 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.
The seven Lifeline providers that we did not receive service from did not  provide it for different reasons. For example:
Two of the seven Lifeline providers informed us that we were denied  because they could not verify the identity of the fictitious applicants  used for our tests.
One Lifeline provider told us that the application was appearing as a  duplicate and was not being accepted by NLAD, even though the  fictitious identity was not enrolled.
One other provider told us that our identity could not be verified and  that the address provided on our application, a UPS Store mailbox,  was in use by another Lifeline customer. We were told only a certain  individual within the company could offer resolution; however, we  made multiple calls and left six messages on this individual’s voice  mail over a 5 week period and did not receive a call back.
The remaining three providers told us that they do not ship to post  office boxes. While FCC regulations do not preclude a Lifeline  provider from accepting a post office box address for a billing address  if different from the subscriber’s residential address, there is no  requirement for them to do so.
We completed two separate tests using different identities for 2 of the 19  providers due to the outcome of the first test for each provider.  Specifically:
One of these providers initially deemed us ineligible for Lifeline, but it  did so because the representative for that provider erroneously  calculated our pay stub income, which if calculated correctly, would  have met eligibility requirements. We reapplied using a different  identity claiming enrollment in a public-assistance program as support  and providing fictitious documentation and were approved for Lifeline.
The other provider approved us for the program, but never provided  us with service. We were given a customer identification number and  phone number, but the provider did not ship us a free phone as  advertised as part of their Lifeline service. We called the Lifeline  provider 11 times over a period of 2-½- months  to inquire about the  status of our service. A company representative told us on multiple  occasions that our phone had been or would be shipped, only to later  say that our phone could not be shipped because the company had  run out of phones. We were told on multiple occasions that the phone  would ship within 4 days, but we did not receive it from the time we  applied in July 2015 through December 2015 and therefore we were  unable to begin our Lifeline service. This provider did not provide an  alternative to participating in Lifeline, such as using our own mobile  device to receive service. We reapplied using a different identity to  determine whether this was a recurring issue with this Lifeline  provider. When reapplying using a different identity, we were told on  separate occasions that our identity could not be validated and to not  apply using low income as the eligibility qualifier. We were also told  that the applicant’s participation in the public assistance program  stated on the application could not be verified. However, an official  from the state where we applied stated that the public-assistance  program in question was not included in a database of public- assistance programs and beneficiaries made available to Lifeline  providers.
Further, we 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.
section_title: USAC Has Taken Steps to Enhance the Accuracy of NLAD Beneficiary Eligibility Data Entered by Providers
paragraphs: USAC officials told us that they had improved both NLAD and the TPIV  process since they were established. USAC officials told us that they had  identified that either Lifeline subscribers or Lifeline providers had  exploited a TPIV override process in NLAD, so they established a control  to remedy the problem. Specifically, USAC officials stated that in 2015  they had modified the duplicate-checking algorithm to add additional rigor  and eliminated the identity override process. Furthermore, as discussed  above, USAC officials stated that they scrubbed all NLAD records to  identify any additional duplicates that may have occurred prior to these  enhancements. This process was completed in May 2015, and resulted in  deenrollment of approximately 374,000 subscribers.
Additionally, for the data that we examined from when NLAD was  launched in March 2014 through November 2014, NLAD subscriber data  contained addresses that were associated with multiple subscribers. For  example, through our analysis we found a single address was associated  with 10,000 separate subscribers, all receiving Lifeline benefits through  the same Lifeline provider. This address could not be verified by the U.S.  Postal Service address verification system we consulted. One Lifeline  provider listed multiple addresses in NLAD with over 500 Lifeline  subscribers, which may be reasonable given that some of the addresses  appear to be associated with homeless shelters. In total, we identified 48  unique addresses that were each associated with more than 500  subscribers. In December 2016, the provider we found with over 10,000  subscribers associated with the same address was fined $30 million and  relinquished FCC and state authorizations to participate in Lifeline; a  fraud investigation by FCC and the United States Attorney’s Office found  employees fraudulently enrolling duplicate and ineligible subscribers into  Lifeline.
Officials from USAC also stated that they are examining ways to utilize  data analytics to check the quality of data in NLAD. For example,  according to USAC officials, they became aware that certain prefixes and  area codes are not used for residential phone numbers and they have  reviewed NLAD for such information to mitigate fraud. Another example of  analytics includes looking for SSN last four digits of “0000,” which is a  last-four-digit code never assigned in actual SSNs, and examining  subscribers who are over the age of 100. Measures such as these, along  with the transition to a National Verifier, as discussed below, should help  data quality concerns in the future and mitigate potential fraud.
section_title: Lifeline Providers’ Verification of Subscriber Eligibility Hindered by Lack of Access to, or Awareness of, State Eligibility Databases
paragraphs: Lifeline has relied primarily on Lifeline providers to verify subscriber  eligibility for the majority of subscribers. Providers are to verify  subscriber eligibility by reviewing supporting documentation or by  checking state eligibility databases that contain information on  beneficiaries of Lifeline-qualifying assistance programs, such as SNAP  and Medicaid. If the data entered into the eligibility databases are  accurate, and Lifeline providers use them as intended, eligibility  databases available to Lifeline providers can be an important tool for  limiting fraud, waste, and abuse in Lifeline by verifying eligibility.
However, not all states have databases that Lifeline providers can use to  confirm eligibility. According to FCC, as of June 2016, databases that  could be utilized for initial eligibility determinations existed in 29 states.  We also found that state databases do not always contain beneficiary  information for every Lifeline qualifying program. Table 2 below shows  what qualifying programs were available for eligibility checks for our case  study states as of June 2016.
Some providers with whom we spoke were unaware of databases that  were potentially available to them. Officials from two Lifeline providers we  spoke with were not aware of all the eligibility databases available for use  in areas where they provide Lifeline service. For example, one Lifeline  provider we spoke to provided us with information stating that 18 states  maintained an eligibility database, while another Lifeline provider that  operated in 41 states at the time told us it knew of only 8 states with  databases. The provider operating in 41 states was unaware of 10 state  eligibility databases in states it operated in that were identified by the  other provider. Officials from one of these companies told us they were  not aware of a comprehensive list of state eligibility databases. USAC  officials confirmed that they do not provide Lifeline providers with a list of  state databases that are available to confirm program eligibility. As a  result, these Lifeline providers and potentially others are not utilizing  required applicant verification tools that are available to them.
Further, USAC does not independently verify that subscribers have been  vetted through the eligibility databases or otherwise verify subscribers’  eligibility. Lifeline providers are required by program rules to access state  eligibility databases, where available, to determine an applicant’s  program-based eligibility. In the absence of such a database, a Lifeline  provider must review proof of enrollment in a qualifying program or proof  of income eligibility. USAC audits of Lifeline providers do check to  determine whether an administrator or eligibility database was relied  upon. USAC does not, however, confirm that beneficiaries that Lifeline  providers report in NLAD as having been vetted through a state database  actually were vetted. Theoretically, a Lifeline provider could enter into  NLAD that a state database or state administrator was used when it was  not. This possibility could partially explain why we could not confirm  eligibility for approximately 70 percent of those individuals we reviewed in  Georgia that, according to NLAD, were deemed eligible by a state  administrator. Officials from Georgia’s SNAP office told us that although  the database is available to ETCs, it is possible they are not using the  database, and Georgia does not have any way to check to see that the  database is being used. As part of their annual recertification  requirements, service providers are required to certify that they have  procedures in place to review income and program-based eligibility  documentation, and confirm eligibility by relying upon access to a state  database or eligibility notice from a state Lifeline administrator, prior to  enrolling a customer in Lifeline. The recertification form states that  “ersons willfully making false statements on this form can be punished  by fine or imprisonment under Title 18 of the United States Code, 18  U.S.C. § 1001.”
Lifeline providers are required to review supporting documentation, such  as a driver’s license or Social Security card, when an applicant’s identity  cannot be verified. However, Lifeline providers are not required to provide  supporting documentation to USAC as part of the TPIV process; instead,  Lifeline providers submit required information stating what documentation  was reviewed, and USAC confirms that the type of documentation  appropriately verifies the subscriber’s identity, but does not review the  documentation itself. As of February 2016, providers are required to  retain all documents used to verify a subscriber’ identity. The planned  National Verifier will retain documentation collected as a result of the  eligibility-determination process, and Lifeline providers will not be required  to retain eligibility documentation for subscribers determined to be eligible  by the National Verifier once it is implemented.
Although state eligibility databases do not exist for all states, and not all  eligible programs are included within those state eligibility databases that  do exist, knowing which states have program-based eligibility databases  is an important first step to allow Lifeline providers to better determine  applicant eligibility prior to enrollment. According to Standards for Internal  Control in the Federal Government, management should use high-quality  information to achieve the entity’s objectives, such as using relevant data  from reliable sources. Maintaining and disseminating an up-to-date list of  available state eligibility databases that includes the qualifying programs  those databases access would help enhance Lifeline providers’  awareness, and potentially use of, these tools. Such a list could also help  USAC, working with the states, whenever possible, to determine which  Lifeline providers had obtained access to state eligibility databases, and  gain greater assurance that providers are fulfilling their responsibility of  ensuring only eligible subscribers are enrolled.
section_title: FCC Has Taken Steps to Create a National Verifier to Determine Eligibility
paragraphs: In March 2016, FCC adopted an order to create a National Verifier that  would determine eligibility rather than having the Lifeline providers do so.  According to FCC, to take steps to foster a long-term technological  solution to Lifeline eligibility and to leverage the program integrity and  enrollment procedures provided by assistance programs that capture 80  percent of the Lifeline eligible population, the number of benefit programs  applicants may utilize for Lifeline eligibility would be reduced. According  to the order, the five qualifying assistance programs that remain permit  easy technological solutions to lay the groundwork for a successful  National Verifier because they have existing and accessible databases  that the National Verifier will be able to use. FCC officials told us that they  intend the National Verifier to interface with both state and federal  eligibility databases. According to FCC, with the exception of SNAP  (which is administered at the state level), all of the eligibility programs  have national databases (i.e., SSI, Veterans Pension, and Medicaid).  FCC officials told us that they are working with USAC to create the  National Verifier. The FCC has set expectations for it to be deployed in  phases with at least five states being launched at the end of 2017, an  additional 20 states launched in 2018, and the remaining states or  territories by the end of 2019. FCC officials told us that USAC was  required to submit a comprehensive draft plan for the National Verifier to  FCC for review and approval by the end of November 2016. USAC  submitted its National Verifier Draft Plan to FCC on November 30, 2016,  outlining its proposed approach to designing and building the National  Verifier. USAC submitted its first updated version of the plan on January  2017. According to FCC officials, USAC will provide a status update to  FCC twice per year throughout the development and implementation of  the National Verifier. FCC officials informed us that in January 2017,  USAC executed a contract with the vendor for the design of the National  Verifier.
FCC and USAC identified challenges to establishing the National Verifier.  As of January 2017, USAC had identified six initial challenges that could  affect the successful launch, build, and operation of the National Verifier,  including: (1) unavailability of data sources that can be used for  automated eligibility; (2) inadequate operational capacity to effectively  manage new processes and high volumes of eligibility verifications; (3)  data-breach preparedness; (4) establishment of connections with state or  federal data source; (5) emergency preparedness; and (6) designing a  system that meets standards. FCC officials further explained that creating  a national eligibility database requires coordination with each state, which  can be time-consuming and challenging. For example, some states have  privacy laws that prohibit sharing eligibility data with the federal  government and data quality may vary from state to state. Additional  potential concerns include challenges supporting subscribers in tribal  areas. USAC has developed mitigation strategies to address several of  these concerns, including working with states, vendors, and other  stakeholders. According to USAC, progress updates to FCC and the  public will continue to be provided every 6 months in updated National  Verifier plans.
section_title: FCC and USAC Have Taken Some Steps to Improve Oversight of Lifeline Providers, but Remaining Gaps Could Allow Noncompliance with Program Rules
subsections: section_title: FCC and USAC Have Implemented Some Mechanisms to Enhance Oversight of Lifeline Providers
paragraphs: FCC and USAC have established mechanisms to enhance their oversight  of Lifeline providers. For example:
As implemented in the 2012 Reform Order, Lifeline-only ETCs that do  not utilize their own facilities must file a compliance plan with FCC  detailing measures they will take to comply with Lifeline regulations as  well as additional safeguards against fraud, waste, and abuse. The  compliance plans should include information about the carrier and the  Lifeline plans it intends to offer, including the names and identifiers  used by the carrier, its holding-company, operating company, and all  affiliates, and how it will comply with FCC’s rules and requirements.
The 2012 Reform Order also required biennial audits of ETCs  providing Lifeline service and receiving $5 million or more annually,  determined on a holding company basis, from the low-income  program. FCC regulations require that licensed certified public  accounting firms independent of the carrier conduct these audits in a  manner consistent with Generally Accepted Government Auditing  Standards. In April 2014, FCC released uniform audit procedures that  the accounting firms must use. As outlined in FCC’s audit procedures,  these reviews would be conducted as agreed-upon procedures  attestations. The first reports included reviews of calendar year 2013  and were submitted in 2015. Due to the nature of these agreed-upon  procedures engagements, each biennial audit report must state that  an examination of the subject matter was not performed. Therefore,  an opinion on the Lifeline provider’s compliance with Lifeline rules  cannot be expressed through these procedures.
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.
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.
Starting in fiscal year 2016, USAC implemented a risk-based selection  method when conducting Beneficiary and Contributor Audit Program  (BCAP) audits to identify the entities with the greatest risk. BCAP  audits are conducted on each USAC program in accordance with  Generally Accepted Government Auditing Standards, with their  primary purpose to ensure compliance with FCC rules and program  requirements, and to assist in program compliance. USAC officials  told us that, before fiscal year 2016, many of the audited entities were  randomly selected, and the selection process was designed to provide  a wide variety of entities with regard to size and geographic location.  See appendix III for more information.
section_title: Oversight Weaknesses of Lifeline Adversely Affect Overall Program Integrity
paragraphs: Our analysis of FCC and USAC oversight of Lifeline providers found  weaknesses in how they oversee providers entering and implementing  the program, and enforcing penalties for violations of program rules. FCC  has plans or has taken some steps to address some of these  weaknesses.
subsections: section_title: FCC Has Not Developed Evaluation Criteria for Providers’ Compliance Plans or Applications for Entering Lifeline and Faces a Substantial Backlog of Both
paragraphs: In its 2012 Reform Order, FCC described how its review of compliance  plans was critical to helping evaluate Lifeline providers’ stated plans to  adhere to program rules before providers receive any Lifeline funds. The  compliance plan review process requires telecommunications providers to  provide specific information regarding their service offerings and the  measures they will take to implement the Lifeline provider obligations as  well as further safeguards against fraud, waste, and abuse that FCC may  deem necessary. However, FCC officials told us that no agency  document exists that instructs reviewers how to evaluate compliance  plans. Without written instructions with criteria for how to review  compliance plans, there is some risk that the compliance plan review  process is not applied consistently or effectively, or is not conducted in  such a way as to help facilitate Lifeline program goals. As a result, the  compliance plan review process is limited in providing some level of  oversight prior to disbursing funds.
Furthermore, FCC has a backlog of pending compliance plans. In 2012,  FCC approved its first 20 compliance plans, and did not approve any  additional plans until August 2016. In August 2016, FCC approved two  plans from Lifeline providers specifically dedicated to wireline service.  According to FCC, the approval of these two compliance plans was  necessary to prevent disruption of Lifeline service for affected wireline  customers. As of March 2017, 22 compliance plans had been approved,  22 had been denied, and 34 were pending. FCC officials told us that the  delay in approving compliance plans was caused by other agency  priorities, but were unable to detail what those priorities were. They also  added that the number of staff assigned to reviewing compliance plans  was limited to four; the staff have also had other assignments and  responsibilities; and these factors were among those that led to the  number of plans pending without an FCC decision. According to FCC  officials, absent statutory time frames specific to the review of compliance  plans and ETC petitions, FCC has not established any time frames for  approving or denying these documents. The resulting situation limits the  expansion of Lifeline service for companies providing and seeking to  provide Lifeline service.
As with the compliance plans, FCC had a backlog of 35 pending ETC  petitions and had approved 7 providers and denied 15 providers as of  March 2017. According to federal statute, telecommunication providers  must submit a petition and be designated as ETCs before they can  receive reimbursement for providing Lifeline service. ETC designations  are made by state regulatory commissions or by FCC if state law does  not grant a state the authority to do so. By not making determinations on  pending compliance plans and ETC petitions, FCC has not implemented  a key aspect of the program’s 2012 reforms. This has created a group of  carriers that can begin or expand their Lifeline service offerings and a  group of carriers that are prevented from entering the marketplace  altogether or from expanding to new geographical markets.
FCC also faces a backlog for petitions to provide broadband services. As  previously discussed, providers seeking to provide Lifeline broadband  service must obtain the newly created Lifeline Broadband Provider (LBP)  designation from FCC. The 2016 Lifeline Broadband Order states that  FCC will take action on LBP designation petitions within 6 months of the  submission of a completed filing. By January 2017, FCC had conditionally  designated nine ETCs as LBPs, but revoked their LBP designations in  February 2017, and returned their LBP petitions to pending status.  According to FCC, revoking the designation provides the agency with  additional time to consider measures that might be necessary to prevent  further fraud, waste, and abuse in Lifeline. In March 2017, the FCC  Chairman stated interest in initiating a proceeding to eliminate the new  federal LBP designation process.
section_title: FCC and USAC Have Limited Oversight of Provider Operations and Internal Control Structure, Risking Noncompliance with Program Rules
paragraphs: 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  ETCs 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. 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. However, we identified key Lifeline functions for  which FCC and USAC had limited visibility.
While FCC approves providers’ participation in Lifeline and USAC  conducts audits to ensure providers comply with program rules, we found  that they do not have full insight into providers’ operations. For example,  we found instances of Lifeline providers utilizing domestic or foreign- operated call centers for Lifeline enrollment. We spoke with officials from  two Lifeline carriers and inquired about their operations. One Lifeline  provider explained to us that it contracts with a company that then  contracts with a back office and a call center in a different country to  handle Lifeline operations. Lifeline provider officials told us that  individuals at this overseas back office are responsible for reviewing  government assistance program documentation and making eligibility  determinations for Lifeline applicants. Officials from the other carrier we  spoke with told us that they use a third-party contractor located in the United States to verify eligibility. Through our undercover tests, we also  found that this company uses an overseas call center to enroll  subscribers. 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 other such call centers comply with Lifeline rules.
Additionally, 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 the Lifeline  program, 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 employees 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 to FCC and USAC  for appropriate action as warranted.
FCC and USAC also have limited insight into when Lifeline providers do  not abide by program rules. As a result, there may be increased risks that  Lifeline providers are not adhering to rules. On the basis of our audit and  undercover work, we identified instances in which Lifeline providers were  applying different policies regarding Lifeline eligibility and enrollment,  contrary to program rules. Examples we encountered of Lifeline providers  applying the rules incorrectly are noted below.
Officials from one provider told us they do not enroll subscribers who  reside in a zip code that includes tribal lands, because it is too difficult  to confirm the subscribers’ addresses as nontribal. According to  Lifeline rules, low-income residents living on tribal lands may be  eligible for Lifeline benefits based on either income or participation in  federal or tribal assistance programs.
Officials for one provider told us that when a subscriber fails the NLAD  identity-validation process, they do not use the dispute-resolution  system designed by USAC and FCC to verify the subscriber’s identity  as required by program rules, because it is too costly. The company  opts to not enroll the customer or attempt to verify the customer’s  identity using the dispute-resolution system.
Customer-service representatives for one provider checked the  authenticity of the SSI documentation we provided as evidence of  qualifying for Lifeline against a state eligibility database that does not  contain SSI information and denied our application. In this case, the  representative was seemingly unaware of the contents of the state  eligibility database and could potentially disqualify legitimate qualified  applicants that use SSI documentation to apply for Lifeline.
Variations in Lifeline provider policies and practices could also affect the  ability of FCC and USAC to provide oversight of how providers maintain  subscriber documentation, which may contain personally identifiable  information, in a secure fashion. The risk to consumer information  security in Lifeline was highlighted by a security breach and associated  FCC enforcement action. In 2013, an investigative reporter alerted two  Lifeline providers that documents submitted by Lifeline applicants were  being stored on an unprotected Internet site. The providers notified FCC,  prompting an investigation. The investigation found that, from September  2012 through April 2013, two Lifeline providers stored sensitive  information collected from subscribers to determine Lifeline eligibility in a  format readily accessible via the Internet, exposing up to 300,000  subscribers’ information to public view and to identity theft and fraud. This  information included full SSNs, names, addresses, and other sensitive  information. In October 2014, FCC proposed a penalty of $10 million.
FCC’s planned National Verifier may address many of the issues we  identified with FCC’s and USAC’s oversight of Lifeline provider operations  if it is fully implemented by the current planned date of 2019. FCC officials  told us that, as the National Verifier is rolled out, responsibility for  eligibility determinations, storage of supporting documentation, and  creation of all application forms will transfer to USAC.
Additionally, USAC has a process that allows Lifeline subscribers to  submit complaints about their service, which could provide USAC with  insights into provider operations, but we identified weaknesses in this  process. USAC has information on its website informing subscribers to  contact their provider if they are experiencing service issues, broken  handsets, or billing disputes. If the provider does not resolve the issue,  then subscribers are informed to contact their state regulatory  commission. After stating an option to contact USAC about the issue, the  final option provided is for subscribers to call FCC for assistance. On the  basis of our review of complaints recorded in 2014 by USAC, some were  closed after USAC referred them back to Lifeline providers without  evidence stating that a subscriber’s issue had been addressed. Some  subscribers stated that they were having difficulty using Lifeline service,  though the individuals’ carriers were potentially billing and receiving funds  for these individuals. Other complaints USAC received included service  not working and phones that were never received. As previously  discussed, we experienced a similar issue with a Lifeline provider  approving us for the program, but not providing us with a phone or other  method to utilize Lifeline while conducting our undercover testing. USAC  told us that it plans to review and revise these processes to improve how  it handles customer complaints.
USAC further conducts a separate review of Lifeline that provides  incomplete visibility over the providers. Specifically, USAC performs  Program Quality Assurance (PQA) assessments to determine the  improper-payment rate for Lifeline pursuant to federal statute and OMB  guidance. The Improper Payments Information Act of 2002, as amended,  (IPIA) requires federal agencies to review programs and activities they  administer and identify those that may be susceptible to significant  improper payments. For programs and activities identified as  susceptible, agencies must annually estimate the amount of improper  payments, implement actions to reduce improper payments, and report  those estimates and actions. IPIA focuses on payments made by a  federal agency, contractor, or an organization administering a federal  program or activity. We have previously reported that improper payments  have consistently been a government-wide issue despite efforts to identify  their root causes and reduce them.
FCC has determined that IPIA applies to the USF programs and that  Lifeline is susceptible to significant improper payments. When  conducting PQA reviews for Lifeline, USAC reviews enrollment and  recertification forms; FCC Form 497s for accuracy; subscriber listings for  completeness; and duplicate subscribers with matching primary address,  date of birth, and SSN. Using results of these assessments, USAC  calculates estimates of improper-payment rates and provides this  information to FCC. According to FCC’s Fiscal Year 2015 Agency  Financial Report, the estimated 2015 improper-payment rate reported for  Lifeline is 0.45 percent, or $7.3 million.
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. For example, the improper-payment rate resulting from the  PQA assessments accounts for duplicate subscribers, missing or  incomplete subscriber data, and other factors that identify various types of  improper-payments, but does not account for payments made to Lifeline  providers that claimed beneficiaries who were not actually enrolled in the  qualifying programs or were ineligible.
FCC officials told us, however, that FCC and USAC will be better able to  include eligibility testing in future year PQA testing given the new Lifeline  rules pertaining to the retention of eligibility documentation. FCC officials  told us that they have discussed these changes in Lifeline rules with OMB  and both parties agree that adding testing procedures in a methodical  manner is reasonable and appropriate.
FCC Has Inconsistently Penalized Providers with Duplicate Lifeline  Subscribers and Has Not Developed an Enforcement Strategy  FCC directed USAC in May 2011 to perform in-depth validations (IDV) to  uncover duplicative claims for Lifeline support. USAC was to do this by  identifying and resolving instances of subscribers who receive  simultaneous Lifeline benefits from multiple Lifeline providers and had  duplicate subscribers within their own subscriber lists. After identifying  providers with duplicate subscribers, FCC was not consistent in the  actions it took, as it penalized some but not all of those providers. IDVs  were conducted at the state level from 2011 to 2013 on 57 Lifeline  providers prior to the implementation of the NLAD database. During this  process, USAC contacted subscribers it identified as having duplicate  service and advised them that they had to choose a single Lifeline  provider. According to information provided by USAC, the IDVs resulted  in the identification of approximately 87,000 intracompany duplicate  subscribers.
Following the IDVs, FCC issued Notices of Apparent Liability that  proposed penalties of approximately $94 million to 12 Lifeline providers  believed to have willfully and repeatedly violated Lifeline rules by enrolling  duplicate subscribers. As of October 2016, FCC had not yet determined  the final penalties for these 12 Lifeline providers.
We found, however, that FCC proposed penalties inconsistently against  Lifeline providers that had duplicate subscribers. For example, USAC’s  IDVs determined that 41 Lifeline providers had intracompany duplicates;  of these, FCC proposed penalties against 12. In some cases, Lifeline  providers that FCC penalized had fewer duplicates than others that were  not penalized. For example:
One Lifeline provider had received $8,300 in overpayments due to  intracompany duplicate subscribers from February through April 2013,  and FCC proposed a fine of $3.7 million. Another Lifeline provider  received approximately $81,000 in overpayments from intracompany  duplicates during the same period and approximately $250,000 in  intracompany duplicate overpayments found during the course of the  IDV review and FCC did not propose a fine for having duplicate  subscribers.
FCC proposed a fine to another Lifeline provider of $1.2 million for  approximately $8,000 in overpayment of duplicate subscribers and did  not propose a fine for another Lifeline provider that had approximately  $16,000 in duplicate subscriber overpayments through the IDV  process.
As a result of FCC’s actions, Lifeline providers that were issued a Notice  of Apparent Liability for duplicate subscribers may have been prevented  from expanding Lifeline service, while others with duplicates were  unaffected. Officials from one Lifeline provider told us that California did  not approve their petition to offer Lifeline service in their state because of  the penalties levied against them.
According to FCC officials, FCC had been unable to issue a Notice of  Apparent Liability against some providers because of the statute of  limitations and delays in receiving IDV results from USAC. FCC is  constrained by a statutory 1-year limitation, which begins when the  violation occurs, on assessing forfeitures against carriers for Lifeline rule  violations. FCC officials explained that the 1-year limitation has  prevented FCC from attempting to assess fines against Lifeline providers  when duplicate subscribers or other Lifeline rule violations were  discovered near the end of this time frame. FCC told us that when the  IDVs were initiated, there was not a formalized process or strategy for  how FCC would address Lifeline providers with duplicate subscribers.  The FCC proceeded with issuing Notices of Apparent Liability after  reviewing the IDV results provided by USAC, though FCC officials were  unable to provide us with information on when the results of the IDVs  were provided to them by USAC.
According to Standards for Internal Control in the Federal Government,  management should implement and document control activities through  policies. FCC officials told us that the penalties that FCC proposed to levy  against Lifeline providers with identified duplicate subscribers were part of  a particular enforcement strategy during that time, but they did not  provide further details on that strategy. Further, according to FCC  officials, in June 2015, the agency did not have a documented  enforcement strategy for proposing penalties against Lifeline providers  who retain duplicate subscribers. As of March 2017, FCC still does not  have a documented enforcement strategy. FCC officials told us that  because its Enforcement Bureau lacks resources to take action in all  instances, targets for enforcement action are generally prioritized where a  problem appears to be pervasive, represents a trend, affects many  consumers, or reflects particularly egregious abuse.
Grounding that approach in an articulated strategy with a rationale and  method for resource prioritization could benefit FCC and the Lifeline  providers against which it may choose to take action in the future. For  example, an enforcement strategy could help FCC and USAC to allocate  resources more effectively so that future IDVs are coordinated and any  potential problems identified can be used for enforcement within the 1- year statutory time frame for enforcement actions. In addition, a strategy  could help enhance the transparency of reasoning behind any  enforcement actions that FCC might take and maximize the effectiveness  of enforcement activities.
section_title: Conclusions
paragraphs: 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. For example, FCC and USAC have limited  knowledge about whether individuals receiving Lifeline benefits are truly  eligible and are receiving services from providers prior to paying Lifeline  providers, or whether Lifeline providers use the state eligibility databases  available to them.
Nevertheless, while some academic studies have raised questions  whether Lifeline is a costly and inefficient means of achieving universal  service, FCC has not evaluated the program to determine whether it is  efficiently and effectively meeting its goals, as we recommended in our  March 2015 report. In March 2016, FCC expanded the program’s  performance goals by including subsidies for broadband service.
However, FCC lacks information about the potential impact of the  expansion and about the extent to which it is meeting its goals of  telephone subscribership, as FCC reported 96 percent of low-income  qualifying households already have phone service. The expansion to  broadband may face many of the challenges that arose in 2008 when  Lifeline expanded to include non-facilities-based wireless service. In light  of our findings, we believe that our March 2015 recommendation remains  valid and relevant.
While FCC established a budget mechanism for the first time in 2016,  FCC did not establish requirements for approving any additional Lifeline  spending beyond budget levels in a timely manner. If the budget is  exceeded in the future, absent a requirement for the Commissioners to  review and approve additional spending in a timely manner, up to a year  or more could pass before the Commission takes any actions, all of which  limits the budget’s ability to control costs.
FCC and USAC have taken steps to address issues we have raised  about the eligibility of subscribers by improving controls to prevent and  detect duplicate enrollment through NLAD. In addition, FCC’s 2016 order  establishing a National Verifier, if implemented as planned, could further  help to address weaknesses in the eligibility-determination process. In the  interim, as evidenced by our data analysis and undercover testing results,  relying on thousands of private companies to verify eligibility creates  significant risks. Further, providers may not have access or may be  unaware of tools available to them to help facilitate such verification.  Maintaining and disseminating an updated list of state eligibility  databases would better position providers to have and use such  information.
New challenges may also occur given that the 2016 reform order now  allows broadband providers to bypass the state ETC designation process,  and instead receive designation from FCC, potentially limiting the states’  ability to guard against waste and abuse. This change is concerning, as  our review of FCC’s current ETC designation and compliance plan review  process found that FCC has a significant backlog, in part because it has  not established time frames for completing such reviews. FCC also does  not have documented instructions with criteria for how to evaluate Lifeline  compliance plans.
Although classified as federal funds, the USF, with net assets of $9  billion, is maintained outside the Treasury in an account with a private  bank. As a result, OMB observed that USF funds do not enjoy the same  rigorous management practices and regulatory safeguards as funds for  other federal programs. In an effort to improve management and  oversight of the funds, FCC has developed a preliminary plan to move the  funds to the Treasury. While acknowledging that, we note that several  years have passed since this issue was brought to FCC’s attention.  Further, the preliminary plan would not result in the funds actually being  moved to the Treasury until next year, at the earliest, which means the  risks that FCC identified will persist and the benefits of having the funds in  the Treasury will continue to not be realized in the near term.
Moreover, USAC’s ability to provide oversight for the collection and  disbursement of billions of dollars of USF funds is complicated by many  factors, including the challenge of ensuring that over 6,000  telecommunications carriers pay USF contributions correctly, and do not  overcharge USF fees to millions of customers when those fees are  passed through to end-users. USAC’s contribution audits were conducted  on less than 1 percent of carriers for the period we reviewed, and typically  found that carriers collected and contributed incorrect amounts of USF  fees. When overpayment of USF fees was identified, FCC did not  consistently follow up on audit findings to ensure customers are  reimbursed and the overcharges stop. FCC recently initiated a new  referral process to help address this issue.
When FCC takes action to address program violations, it does so  inconsistently, likely because it has not established an enforcement  strategy. FCC has also not yet responded to USAC requests for guidance  on whether technologies, such as text services, require USF fees. As a  result, some carriers collect more from customers and pay more into the  fund than others for the same service, though USF fees are required by  law to be paid on an equitable and nondiscriminatory basis. Further, when  carriers pass through USF charges via line items on customer bills,  USAC’s contribution audits do not determine whether the labeling meets  FCC Truth-in-Billing rules, which are intended to help ensure customer  bills are transparent and appropriately labeled and described to help  consumers detect and prevent unauthorized charges. Taking action to  address these weaknesses would help FCC address risks we identified.
section_title: Recommendations for Executive Action
paragraphs: To address control weaknesses and related program-integrity risks we  identified in Lifeline, we recommend that the Chairman of FCC  require Commissioners to review and approve, as appropriate,  spending above the budget in a timely manner; 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; this step would help  ensure Lifeline providers are aware of state eligibility databases and  could also help ensure USAC audits of Lifeline providers can verify  that available state databases are being utilized to verify subscriber  eligibility; 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; and 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; the  strategy should include a rationale and method for resource  prioritization to help maximize the effectiveness of enforcement  activities.
To address our findings regarding the USF, we recommend that the  Chairman of FCC take action to ensure that the preliminary plans to transfer the USF funds from the  private bank to the U.S. Treasury are finalized and implemented as  expeditiously as possible;  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 charges; and  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.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to FCC and USAC for review and  comment. In written comments, reproduced in appendix IV, FCC  generally agreed with our recommendations. FCC and USAC both  provided technical comments, which we incorporated as appropriate.  USAC did not provide written comments on the draft report.
In commenting on our recommendations, FCC stated that it agreed with  the recommendations or outlined actions it was already taking to address  the recommendation. Regarding our recommendation that the  commission respond to USAC requests for guidance and address  pending requests concerning USF contribution requirements, FCC noted  that it has resolved a number of long-standing requests from contributors  and expects to address additional questions in the future, which is  consistent with what we recommend. However, FCC went on to comment  that the commission referred the question of USF contribution reform to  the Federal-State Joint Board on Universal Service; thus, these requests  for guidance, as well as many of the remaining pending requests from  contributors, may be resolved in that proceeding. Moreover, FCC  commented that it recognizes the need for administrative efficiency, but  must respect the processes of the institutions in place, which are  designed to ensure the long-term sufficiency and predictability of the  USF. In our report, we noted the steps taken by FCC in attempts to  reform and modernize the USF contribution system, including FCC’s 2012  Further Notice of Proposed Rulemaking, and FCC’s 2014  recommendation on contribution reform sought from the Federal-State  Joint Board on Universal Service. However, these items have been  pending for years, and the USAC guidance requests pertaining to carrier  USF fee requirements have been pending as far back as 2009.  Therefore, we urge FCC to come to a resolution and respond to USAC  requests for guidance in a timely manner 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.
Finally, FCC commented on our findings regarding its banking practices  surrounding the USF. Specifically, in its letter FCC noted that USF funds  currently are maintained in an account with a private bank but that it plans  to move them to the Treasury. However, in May 2017, while reviewing a  draft of this report, a senior FCC official informed us that FCC had  experienced some challenges, such as coordinating across the various  entities involved, that raised questions as to when and perhaps whether  the funds would be moved as planned. Accordingly, we have revised the  report and added a recommendation that FCC 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. We believe such  a recommendation is warranted given the amount of time that has passed  since FCC became aware of this issue and given the USF’s $9 billion in  net assets, as well as the potential risks and benefits cited by FCC when  it initially made the decision to move the funds to the Treasury. We  provided FCC and USAC with the revised portions of the report, including  the new recommendation, for review and comment. FCC agreed with the  additional recommendation and USAC provided no comment.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  Chairman of the FCC, the Chief Executive Officer of USAC, and  interested congressional committees. This report will also be available at  no charge on the GAO website at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-6722 or bagdoyans@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This appendix discusses in detail our methodology for addressing four  research questions: (1) the extent to which the Lifeline program (Lifeline)  demonstrates effective performance towards program goals; (2) steps the  Federal Communications Commission (FCC) and Universal Service  Administrative Company (USAC) have taken to improve financial controls  in place for Lifeline and the Universal Service Fund (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.
To explore the extent to which Lifeline demonstrates effective  performance towards program goals, we reviewed numerous documents  including FCC’s 2012 Reform Order, FCC’s 2016 Modernization Order,  and Pew Research Studies cited by FCC in support of expanding Lifeline  to include broadband. We followed up on our 2015 work by reviewing two  academic studies that evaluated the effect of Lifeline referred to us by  FCC. Our prior work determined these academic studies met our criteria  for methodological quality. We also gained the perspective of a range of  stakeholders through interviews with program agency officials (FCC’s  Enforcement Bureau, Wireline and Competition Bureau, Office of  Managing Director, and Office of General Counsel); officials from  Lifeline’s program administrator (USAC); state officials (National  Association of Regulatory Commissioners); and representatives from an  advocacy group with members representing more than 200 national  organizations (Leadership Conference on Civil and Human Rights); two of  the largest Lifeline providers according to annual disbursements received  from Lifeline; and two telecommunications law firms representing  numerous Lifeline providers.
To determine the steps taken by FCC and USAC to improve financial  controls in place for Lifeline and USF, and any remaining weaknesses  that might exist, we examined USAC financial data, including USF bank- account statements, payment data, and financial reports. We performed a  walk-through of USAC’s processes to enter and approve Lifeline  providers and administer USF disbursements. We analyzed 74 USF  contribution audits conducted with audit periods in calendar years 2007  through 2013 (approximately the past 5 years of contribution audits  issued as of the time we requested them in December 2015). We  reviewed USAC guidance requests; FCC Office of Inspector General  reports; FCC orders, policies, and other key guidance; and Treasury  guidance on fiscal policy. We interviewed officials from USAC’s Internal  Audit Division, a USF account manager and attorney with the private  bank that holds USF, as well as officials from the U.S. Treasury, Bureau  of the Fiscal Service, and FCC’s Office of Inspector General. We also  attended USAC board meetings.
To evaluate the steps FCC and USAC have taken to improve subscriber- eligibility verification, and any remaining weaknesses that might exist, we  performed data analysis to identify potential improper payments using  Lifeline’s National Lifeline Accountability Database (NLAD) and other  beneficiary databases, conducted covert testing of Lifeline providers while  posing as Lifeline applicants, reviewed documentation discussing  subscriber-validation and eligibility controls, and interviewed officials from  FCC and USAC.
To identify potential improper payments, our Lifeline subscriber data  analysis determined whether Lifeline subscribers who reported qualifying  for the program due to participation in another federal program were  enrolled in the specific programs recorded in NLAD. We obtained NLAD  data in November 2014. The data contained a snapshot of enrolled  Lifeline subscribers as of that date. We selected the three largest  qualifying programs identified by FCC to test the eligibility of subscribers  in NLAD; the U.S. Department of Agriculture’s Supplemental Nutrition  Assistance Program (SNAP), the Department of Health and Human  Services’ Medicaid program, and the Social Security Administration’s  (SSA) Supplemental Security Income (SSI) program. We obtained  nationwide SSI eligibility data from SSA and obtained SNAP and  Medicaid data from selected states as these two programs’ data are  maintained at the state level. Specifically, we obtained SNAP eligibility  data from five states and Medicaid eligibility data from six states. As a  result, we obtained data from a nongeneralizable selection of states. Our  state selections were selected based on the highest dollar amount of  2013 nontribal Lifeline disbursements and were selected to include  states that do and do not have a third-party administrator that can make  eligibility determinations and states that do and do not have an eligibility  database that can be used by Lifeline providers to validate eligibility in a  qualifying Lifeline program.
We obtained SNAP data from Florida, Georgia, Michigan, New York, and  Ohio. Lifeline providers in these states received the largest Lifeline  disbursements of NLAD participating states. We identified Florida as a  state with a third-party administrator that verifies eligibility. We identified  Georgia, Michigan, and New York as states with an eligibility database  that can be used to validate enrollment in a Lifeline qualifying program.  Ohio did not have an eligibility database or third-party administrator at the  time of our state selection. We utilized Center for Medicare & Medicaid  Services (CMS) Medicaid Statistical Information System (MSIS) data to  obtain Medicaid eligibility information from Florida, Georgia, Michigan,  Nebraska, New York, and Ohio. Nebraska was another state identified as  using a third-party administrator to verify eligibility, and was selected as  an alternative to Florida because the Florida Medicaid data at the time of  our state selection were only validated through 2011. However, during the  course of our audit, Florida validated Medicaid data that met our review  time frame. Consequently, both states were included in our analysis of  Medicaid eligibility data.
To assess the reliability of the different datasets, we interviewed officials  from agencies responsible for their respective databases to discuss data- related considerations and performed electronic testing to determine the  validity of specific data elements in the federal and selected state  databases that we used to perform our work. We also reviewed related  documentation, including data layouts and information on database  controls. On the basis of our discussions, documentation review, and our  own electronic testing of the data, we concluded that the data fields used  for this report were sufficiently reliable for the purpose of this  engagement. However, we did identify issues in the NLAD data that  suggested the potential for data-entry errors (such as a February 30  birthdate). We excluded cases that were clearly in error from our analysis.
We utilized the most up-to-date SNAP and MSIS data available at the  time of our analysis. The six states selected for our Medicaid analysis had  eligibility dates from the third quarter of 2012 through the most recent  eligibility fiscal quarter available for each state—at the time of our data  request—which ranged from the third quarter of 2012 to the fourth quarter  of 2014. Specifically, Medicaid eligibility data for Florida and Michigan  were available through September 2013; for Nebraska and Ohio, through  December 2013; and for Georgia and New York, through September  2014. For our analysis of NLAD and Medicaid data, we only matched  against Lifeline subscribers that enrolled prior to the latest Medicaid  eligibility data available for each state. States can take up to 3 years to  adjust their Medicaid data, and as a result beneficiaries can be included  or excluded retroactively. Because Medicaid data are collected and  maintained by the states, the consistency, quality and completeness of  the data can vary from state to state.
Our nationwide SSI eligibility data ranged from October 2012 to  December 2014, and each of the five selected states’ SNAP data ranged  from October 2013 to December 2014. Therefore, it was not necessary to  exclude any Lifeline subscribers prior to matching. In the event that any of  the Lifeline subscribers were only shown as eligible for the month of  December 2014, they were nevertheless counted as a match and  deemed likely eligible for Lifeline, even though NLAD data were only as of  November 2014.
To ensure that our tabulations of unconfirmed eligibility are not  overstated, we excluded any Lifeline subscribers that were enrolled in  NLAD after the date range available for our review for each qualifying  program. For example, if NLAD showed a subscriber enrolled in Lifeline in  July 2014 and the corresponding date range for the qualifying program  we reviewed had enrollment data only through December 2013, then this  subscriber was excluded from our matching results. To further prevent the  possibility of overstating unconfirmed eligibility, we counted subscribers  as likely eligible for Lifeline if the Lifeline subscriber was enrolled in the  qualifying programs at any time within the range of dates provided to us  for each qualifying program we reviewed. For example, if NLAD shows a  subscriber enrolled in April 2014, but was not enrolled in the qualifying  program until June 2014, it was nevertheless counted as a match and  that the subscriber was likely eligible for Lifeline. As a result, we are likely  understating the unconfirmed match rate as some individuals may have  enrolled in the qualifying program after the Lifeline enrollment date.  However, given the potential for data-entry errors in NLAD, there is also  potential for overstatement of unconfirmed eligibility.
We conducted work to determine that each subscriber was enrolled in a  Lifeline qualifying program. To do this, we matched NLAD data to the  SNAP, Medicaid, and SSI data to identify potential improper payments.  We compared the enrolled Lifeline subscriber identity information  recorded in NLAD as of November 2014 to the SNAP, Medicaid, and SSI  eligibility data. For the purpose of our analysis, we considered a  subscriber in NLAD to be a likely match and enrolled in SNAP if at least  four of the following fields matched between NLAD and SNAP data from  each state: subscriber first name; subscriber last name; subscriber date  of birth; last four digits of the subscriber’s Social Security Number (SSN);  and an exact address, zip-code, and state match. We considered a  subscriber listed in NLAD to be a likely match and enrolled in SSI if the  subscriber first name, last name, date of birth, and last four digits of the  SSN matched exactly with the SSI program data.
To ensure that our tabulations of unconfirmed eligibility do not overstate  potential problems with the data, for SNAP and SSI we counted first and  last name matches with inexact, but similar, spelling to be a likely match  and enrolled in the qualifying programs. Whereas, for Medicaid, we  considered a subscriber listed in NLAD as a likely match enrolled in the  qualifying program if the date of birth, last four digits of the SSN, and zip  code matched exactly with Medicaid data for each state because the  Medicaid data we utilized did not contain beneficiary first or last name  information. As a result of not using first or last name, our Medicaid  matching may understate unconfirmed eligibility for Medicaid. We also  matched NLAD data against the SSA’s Death Master File (DMF) to  identify subscribers that were listed as deceased at least 1 year prior to  their initial Lifeline enrollment or required annual Lifeline recertification. To  ensure that our tabulations of those Lifeline subscribers showing  deceased in the DMF were not overstated, we required an exact match  between NLAD and the DMF for the following four fields: first name, last  name, date of birth, and last four digits of the SSN.
The results of our data matching are not generalizable to any other state  or qualifying Lifeline program. It is not possible to determine from data  matching alone whether these matches definitively identify recipients who  were not eligible for Lifeline benefits without reviewing the facts and  circumstances of each case. For example, we could not identify based on  the data alone whether there were data-entry errors at the time of  enrollment incorrectly stating the qualifying Lifeline program presented by  the subscriber at the time of enrollment. Alternatively, our matches may  also understate the number of deceased individuals receiving assistance  because matching would not detect Lifeline subscribers whose identifying  information in the Lifeline qualifying program data differed slightly from  their identifying information in NLAD.
To test subscriber controls and the vulnerability of improper payments, we  also conducted undercover testing of 19 Lifeline providers to determine  whether we could obtain Lifeline service using fictitious eligibility  documentation. We selected these providers based on the providers with  the largest 2014 Lifeline disbursements that allowed us to apply  electronically, through telephone, fax, or mail. We submitted 21 Lifeline  benefit applications or otherwise attempted to obtain service using false  information and fabricated supporting documents. These undercover tests  were for illustrative purposes and are not generalizable. We also  reviewed FCC’s Lifeline Reform and Modernization Orders, FCC and  USAC documentation discussing subscriber controls, FCC guidance, and  Lifeline enforcement actions and proposed penalties for violations of  Lifeline rules.
To determine the steps FCC and USAC have taken to improve oversight  of Lifeline providers, and any remaining weaknesses that might exist, we  met with officials from FCC, FCC’s Office of Inspector General, USAC,  and two Lifeline providers. We reviewed FCC documentation, including  Lifeline Reform Orders, Lifeline provider enforcement actions, and  required Eligible Telecommunications Carrier (ETC) petitions and Lifeline  compliance plans. We reviewed USAC documentation, including audits  conducted by USAC and certified public-accounting firms, Lifeline  subscriber complaints, and work performed to identify duplicate  subscribers. We reviewed information on 93 USAC Lifeline Beneficiary  and Contributor Audit Program (BCAP) audits. We also analyzed reports  released by the FCC Office of Inspector General.
We conducted this performance audit from June 2014 to May 2017 in  accordance with Generally Accepted Government Auditing Standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. We conducted our related  investigative work in accordance with investigative standards prescribed  by the Council of the Inspectors General on Integrity and Efficiency.
section_title: Appendix II: Nationwide Percentage of Likely Lifeline Eligibility Confirmed and Unconfirmed for those Claiming Eligibility, Based on Supplemental Security Income
subsections: section_title: Total population 7,573
section_title: Appendix III: Additional Information about Beneficiary and Contributor Audits
paragraphs: Beneficiary and Contributor Audit Program (BCAP) audits are conducted  on each Universal Service Administrative Company (USAC) program in  accordance with Generally Accepted Government Auditing Standards,  with their primary purpose to ensure compliance with Federal  Communications Commission (FCC) rules and program requirements,  and to assist in program compliance. As part of these audits, USAC  determines whether the number of Lifeline subscribers that providers  claim for reimbursement can be supported by the providers’ internal  records. The scope of these audits does not include work to determine  whether Lifeline service was working for subscribers, or to determine the  extent of any service issues and how many potential subscribers could be  affected. USAC officials told us that, before fiscal year 2016, many of the  audited entities were randomly selected, and the selection process was  designed to provide a wide variety of entities with regard to size and  geographic location. Starting in fiscal year 2016, USAC implemented a  risk-based selection method to audit the entities with the greatest risk.
A small percentage of Lifeline providers and Lifeline disbursements  undergo BCAP audits. Of the 93 BCAP Lifeline audits with audit periods  covering Lifeline disbursements from 2010 to 2014, 13 were of providers  that received less than $1,000 in support during the period reviewed by  USAC. In its 2012 Reform Order, FCC directed USAC to audit new  carriers within the first year they begin receiving federal low-income  Universal Service Fund (USF) support. FCC concluded that an initial  audit will aid efficient administration of the program by confirming early on  that the new Eligible Telecommunications Carriers (ETC) are providing  Lifeline service in accordance with program requirements. According to  USAC, many of these required audits were of carriers with nominal  subscribers, and thus, in receipt of nominal disbursements. Table 4 below  illustrates the audit coverage from BCAP audits from 2010 to 2014 and  displays the percentage of carriers that were audited and the percentage  of the total USAC Lifeline provider disbursement during these periods.
The audit findings for the audits we reviewed found that some carriers  were not complying with Lifeline rules in some capacity, such as  inaccurate Lifeline subscriber claim reporting, inaccurate recertification  reporting, and lack of required subscriber certification documentation.
As part of the BCAP audit, USAC officials stated they generally review a  Lifeline provider’s operations in one or two states during a 1-month period  of time regardless of how many states the provider operates in. USAC  officials told us that when it notes a material issue that could impact the  program from a holding company level, the audit work is expanded. For  example, during an audit of one provider, USAC found the company was  failing to deenroll subscribers, which led to a $10.9 million forfeiture  assessed by FCC.
section_title: Appendix IV: Comments from the Federal Communications Commission
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Dave Bruno (Assistant Director),  Scott Clayton (Analyst-in-Charge), and Daniel Silva made key  contributions to this report. Other contributors include Maurice Belding,  Gary Bianchi, Clayton Clark, Julia DiPonio, Michelle Duren, Colin Fallon,  Robert Graves, Scott Hiromoto, Mary Catherine Hult, Mitch Karpman,  Lauren Kirkpatrick, Barbara Lewis, George Ogilvie, Joshua Parr, Ramon  Rodriguez, and Julie Spetz.