Objective: This study examined the association between medication adherence and health care costs and utilization in diabetes patients. Previous studies that have investigated this relationship, did not necessarily examine patients newly starting antidiabetic therapy. Methods: The North Carolina Medicaid database was used to identify type 2 diabetes patients 18-64 years using at least one ICD-9 code for type 2 diabetes (250.xx, excluding type 1 diabetes codes) and one NDC code (National Drug Code) for antidiabetic medication. New starts of metformin, sulfonylureas, and thiazolidinediones, the most commonly used oral antidiabetic medications, were identified during July 1, 2001 to June 30, 2002. Adherence was measured as Medication Possession Ratio (MPR). Total annual healthcare costs, all-cause hospitalization and all-cause emergency department (ED) visit were examined. Linear multiple regression analysis was employed to study the effect on healthcare costs and logistic regression analyses for hospitalization and ED visit. Results: Adherence to new oral antidiabetic medication was 56%. Mean total annual health care costs were $10,000. Almost 37% were hospitalized and 40% had ED visit. No association was found between medication adherence and costs. Increasing MPR by 10% was significantly associated with 6.9% decrease in likelihood of hospitalization (OR: 0.31, 95%CI: 0.23 – 0.41) and 5.1% decrease in likelihood of ED visit (OR: 0.49, 95% CI: 0.38 – 0.63). Conclusion: Increased medication adherence to newly started oral antidiabetic therapies was associated with decreased risk of healthcare utilization in Mediciaid-enrolled patients with type 2 diabetes. Physicians and pharmacists' active role in advising Medicaid patients on importance of pharmacotherapy, especially, for those newly starting a therapy is necessary.