Democrats have also challenged Lifeline's excesses. Senator Claire McCaskill, from Missouri, drew attention last year to Lifeline's minimal oversight after receiving a flyer at home inviting her to get a free cell phone. (With an annual Senate salary of $174,000, McCaskill isn't exactly the target market.)

The FCC implemented anti-fraud measures earlier this year, requiring subscribers to prove their eligibility, canceling service if the phone is not used for 60 days, and preventing individuals from having multiple phones. The agency says it canceled 800,000 duplicate contracts and expects to save $200 million this year.

Lifeline "wreaks havoc" in the competitive market, according to Roger Entner, the founder of Recon Analytics, a wireless industry research and consulting firm. Carriers targeting the prepaid market -- one of the industry's fastest-growing segments -- can't compete with free phones.

But in the end, he thinks the safety net is worth it.

"As a country we want everyone to have communications. Without a phone, you can't get a job," Entner says. "I'm sure that Lifeline has literally saved people's lives."