Multidrug-resistant tuberculosis (MDR-TB) accounts for one third of the annual deaths due to antimicrobial resistance. Drug resistance-conferring mutations frequently cause fitness costs in bacteria^{, , –}. Experimental work indicates that these drug resistance-related fitness costs might be mitigated by compensatory mutations^{, , , –}. However, the clinical relevance of compensatory evolution remains poorly understood. Here we show that, in the country of Georgia, during a 6-year nationwide study, 63% of MDR-TB was due to patient-to-patient transmission. Compensatory mutations and patient incarceration were independently associated with transmission. Furthermore, compensatory mutations were overrepresented among isolates from incarcerated individuals that also frequently spilled over into the non-incarcerated population. As a result, up to 31% of MDR-TB in Georgia was directly or indirectly linked to prisons. We conclude that prisons fuel the epidemic of MDR-TB in Georgia by acting as ecological drivers of fitness-compensated strains with high transmission potential.