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OBJECTIVE: To describe the direct medical costs associated with type 2 diabetes, as well as its treatments, complications, and comorbidities. RESEARCH DESIGN AND METHODS: We studied a random sample of 1,364 subjects with type 2 diabetes who were members of a Michigan health maintenance organization. Demographic characteristics, duration of diabetes, diabetes treatments, glycemic control, complications, and comorbidities were assessed by surveys and medical chart reviews. Annual resource utilization and costs were assessed using health insurance claims. The log-transformed annual direct medical costs were fitted by multiple linear regression to indicator variables for demographics, treatments, glycemic control, complications, and comorbidities. RESULTS: The median annual direct medical costs for subjects with diet-controlled type 2 diabetes, BMI 30 kg/m(2), and no microvascular, neuropathic, or cardiovascular complications were 1,700 dollars for white men and 2,100 dollars for white women. A 10-kg/m(2) increase in BMI, treatment with oral antidiabetic or antihypertensive agents, diabetic kidney disease, cerebrovascular disease, and peripheral vascular disease were each associated with 10-30% increases in cost. Insulin treatment, angina, and MI were each associated with 60-90% increases in cost. Dialysis was associated with an 11-fold increase in cost. CONCLUSIONS: Insulin treatment and diabetes complications have a substantial impact on the direct medical costs of type 2 diabetes. The estimates presented in this model may be used to analyze the cost-effectiveness of interventions for type 2 diabetes.