January 22, 2019
2 min read

Should new antibiotics be taken out of the hospital DRG system?

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In the United States, the diagnosis-related group (DRG) system dictates how much hospitals are reimbursed by Medicare for expenses, including antibiotics. Infectious Disease News asked Kevin Outterson, JD, LLM, professor of law at Boston University and executive director of CARB-X, a public-private partnership dedicated to accelerating antibacterial research, if new antibiotics should be taken out of the hospital DRG system permanently and get reimbursed separately.

Yes, this reform is needed immediately, paired with strong antibiotic stewardship rules from the CDC and Medicare. Under the current system, hospitals are punished for using more innovative antibiotics. No wonder that thousands of U.S. hospital patients each month receive an old antibiotic called colistin that has potential negative side effects; the only virtue of colistin is its cheap price.

Kevin Outterson

The U.S. hospital diagnostic-related group (DRG) system was a Reagan-era Medicare price-fixing reform designed to save money. Before 1983, Medicare paid hospitals based on a cost-plus formula, which meant that as hospitals spent more on new buildings and fancy machines, Medicare just paid the bill, with predictable results (skyrocketing expenses).

The DRG reform combined the various services performed by hospitals into bundles and paid a fixed price for every similar diagnosis. The DRG solved many problems, but created others, which has forced Medicare to react many times to respond. Destroying antibiotic innovation is just the latest unintended consequence to surface from the DRG system. We should not pay for innovative antibiotics the same way we pay for bedpans and Band-Aids, not if we want to keep up with drug-resistant bacteria.

Outside of the hospital, Medicare pays for outpatient antibiotics on a cost-plus basis. That system would work well for hospital antibiotics as well, but only so long as no one had a financial incentive to prescribe too many antibiotics, which is why it is past time for the proposed Medicare and CDC rules on antibiotic stewardship to become mandatory across all U.S. hospitals.

Making this one change to hospital antibiotic reimbursement would breathe some life into the thin research and development pipeline of antibiotic drugs. It would ideally be paired with some form of market entry reward for exceptionally innovative antibiotics, such as entirely new classes of drugs directed against gram-negative bacteria. Together, these reforms can ensure a sustainable supply of effective antibiotics for future generations.

Disclosure: Outterson reports no relevant financial disclosures.

Disclaimer: These views are my own, and do not necessarily reflect the views of the funders of CARB-X.