OBJECTIVES: Type 2 Diabetes mellitus (T2DM) is a frequent comorbid condition with obesity. The increasing prevalence of obesity in the USA, coupled with the rising prevalence of T2DM and the high up-front cost of bariatric surgery, has necessitated payers to question the cost-effectiveness of bariatric surgery as a treatment for T2DM. Our analyses compared cost-effectiveness of the Roux-En-Y gastric bypass surgery with medical management for T2DM patients using clinical outcomes data from a bariatric surgery practice at the University of Minnesota and modeling these 2-year observational follow-up data to a lifetime horizon. METHODS: The CORE Diabetes Model was used to project lifetime clinical and economic outcomes for T2DM patients undergoing bariatric surgery. The baseline mean HbA1c (7.7%), age (50.7), body mass index (48.8 kg/m2), gender (22% male), race/ethnicity, and risk factors were taken the University of Minnesota cohort (n=169). Remaining cohort characteristics, transition probabilities, utilities, direct treatment, and complication costs were obtained from published sources. All costs and clinical outcomes were discounted at 3% per annum. RESULTS: Average lifetime total direct costs per patient were $96,696 (±3,349) for Roux-En-Y gastric bypass and $77,169 (±2,674) for medical management. Discounted life expectancy and quality-adjusted life years (QALYs) increased by 0.578 (±0.470) years and 0.827 (±0.501) QALYs, respectively, for Roux-En-Y gastric bypass compared with medical management. The resulting incremental cost-effectiveness ratios (ICERs) for Roux-En-Y gastric bypass compared with medical management were $33,795/life-year gained and $23,618/QALY gained. Probabilistic sensitivity analysis demonstrated a 79.3% likelihood of the cost/QALY being ≤$50,000/QALY for Roux-En-Y gastric bypass compared with medical management. CONCLUSIONS: Cost-effectiveness was driven primarily by superior HbA1c, lipid reductions, and weight loss. The ICERs obtained in our analyses provide evidence for the long-term cost-effectiveness of Roux-En-Y gastric bypass as a treatment for T2DM and is consistent with current threshold values in the USA for health technology assessment.