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Considerations for Pricing & Formulary Access for DRG-Funded Hospital Drugs

In the United States, treatments or medical services that require the patient be admitted into a hospital or other health care facility are typically paid for via diagnosis-related group (DRG) reimbursement, a bundled payment methodology for inpatient care. Under DRGs, the payer reimburses the provider a lump sum for the totality of the patient’s care (excluding physician fees), rather than pay individually for services and treatments.

The reimbursement a hospital receives for a given DRG varies based on the base rate, adjustments, and payer:

  • The DRG base rate is based on the average cost of treatment for that DRG, including primary diagnoses, secondary diagnoses, comorbidities, procedures, age, and gender.
  • The base rate is then adjusted based on various factors, including the wage index for a given area, to determine the payment rate for the provider.
  • DRG rates for Medicare Part A and traditional Medicaid are set by law and publicly available; rates for commercial insurers, Medicare Advantage and managed Medicaid are private and are negotiated between the payer and provider but are typically ~30% higher.
DRG reimbursement
Methodology typeBundled payment
Site of careInpatient (hospital)
Payer types utilizing methodology
  • Commercial
  • Medicare Part A
  • Medicare Part C (“Medicare Advantage”)
  • Traditional Medicaid
  • Managed Medicaid
Strategy considerations
  • No patient cost-sharing for drugs
  • Payers typically do not manage drugs used in inpatient setting.
  • Provider retains any difference between DRG payment and cost of care, reducing treatment cost increases provider revenue

Understanding available reimbursements

Because DRGs are set amounts, manufacturers developing products used in the inpatient setting face the challenge of convincing hospitals that the product’s benefits justify increased costs in the face of no/limited additional reimbursement.

How do we do this?

Comparing DRG payment rates to the average costs of treatment for that DRG can reveal whether a particular DRG is revenue-positive or revenue-negative.

What happens if analysis shows the current DRG is not sufficient to cover the cost of a new product?

Frequently the results show a revenue gap already exists (treatment costs are higher than reimbursement), or that hospitals are barely breaking even. Does this mean that commercial prospects for new inpatient products are necessarily gloomy?

Fortunately, no. Certara’s project experience shows that hospitals may be willing to add new products to the formulary even if it results in negative margins for the associated DRG.

  • Products demonstrating strong clinical value have a high likelihood of formulary addition, despite the increased cost of treatment. Characteristics of such products include:
    • Curative or life-saving product
    • Politicized/emotional advocacy
    • First to market
    • Acute treatment
  • Academic medical centers and teaching hospitals may have sources of funding beyond DRG payments.
    • Some hospitals, especially those part of larger health care systems, receive additional government and/or private funding.
    • “Prestige” institutions and centers of excellence are concerned about their reputation for providing cutting-edge medical care with the latest medical innovations.
  • Additional reimbursement is possible in the medium-term and long-term via the new technology add-on payment (NTAP) process.
    • Although the DRG bundled payment covers most drugs, devices, and supplies, certain qualifying products are also eligible for additional payment above the standard DRG payment amount via the NTAP designation.

DRG payment rates may not be the relevant metric for hospitals.

Hospitals’ financial analysis during the formulary review process typically focuses on acquisition cost and cost-offsets to the hospital, rather than reimbursement. Most hospitals focus more on institution-wide cost control initiatives (i.e., decreasing inpatient length of stay, reducing hospital-acquired infections, decreasing readmissions) as opposed to comparing costs to reimbursement for the 700+ individual DRGs.

Hospital interest in the product is likely to increase if cost recovery is assured or offset.

Demonstrating cost recovery or offsets requires an initial understanding of the existing treatment pricing and formulary access landscape that the new hospital inpatient drug will be entering. Broadly, however, cost recovery or offset areas of particular interest include the following:

  • Reduction in length of stay
  • Reduction in readmissions
  • Overall Hospital Quality Star Rating
  • Measures linking hospital quality to payment:
  • Hospital Readmissions Reduction Program (HRRP)
  • Hospital Value-Based Purchasing (VBP) Program

“So what?”

Understanding the “who, what, and where” of the current treatment landscape is needed for educated and evidence-based considerations for pricing and achieving formulary access for a new hospital inpatient drug. Drug and technology developers should not be discouraged by the DRG system. Successfully launching a new inpatient drug is challenging, but achievable with a thorough understanding of the landscape and the right strategy.  

If you need guidance navigating the DRG system, our experts can help!

About the authors

Caitlin Verrilli, MBA
By: Caitlin Verrilli, MBA

Caitlin Verrilli is an Associate Director, US Access Strategy. She joined Certara in 2021 and brings experience from across the healthcare industry, including pricing and contracting, market access planning, value-based care, and advanced modelling skills.

Caitlin’s specialties include data presentation and visualization, Medicaid and Medicare policy and innovation, reimbursement strategies, multi-channel analytics, budget impact modeling, financial forecasting, and ROI metrics. She is also a trained workshop facilitator and CQI (continuous quality improvement) coach.

Rebecca Calvo-Cruz, MSc
By: Rebecca Calvo-Cruz, MSc

Rebecca Calvo-Cruz, MSc is an Analyst, US Access Strategy, within Certara’s Evidence and Access Group. She joined Certara in 2021 and brings experience in healthcare sales/strategy and neuroscience research. Rebecca assists projects in launch pricing, contracting, market segmentations, and due diligence.

Prior to Certara, Rebecca completed her MSc in Neuroscience from King’s College London in England where she led a team conducting meta-analytic research investigating the reporting quality and reproducibility of meta-analyses that focused on ADHD interventions, which she presented at the World Federation of ADHD’s 9th World Congress of ADHD.

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