Objective: To determine the extent to which diabetes among obese and morbidly obese subjects affects health care costs, and to determine whether obesity and morbid obesity remain predictors of health care costs after controlling for diabetes. Methods: Data from the Medical Expenditure Panel Survey (MEPS) for 2000-2004 are examined. Multivariate models are estimated to predict the probability of incurring any health care costs and health care costs incurred. These models include obesity and morbid obesity, diabetes, age, education, occupation category and race. Models are estimated separately by gender. Estimates of out-of-pocket, insurer, and total costs are obtained. Both per capita and national aggregate cost estimates are obtained. Results: Both out-of-pocket costs rise dramatically among obese and morbidly obese subjects who are diabetic. Relative to healthy weight individuals, out-of-pocket costs for obese diabetics increase by $1002 per annum for females and $1051 for males. The cost increases are even greater among morbidly obese diabetics-- $1551 for females and $1555 for males. Insurer costs increase for obese diabetics are $3897 for females and $3651 for males. Among morbidly obese diabetics, these cost increases total $7302 for females and $8008 for males. The aggregate out-of-pocket costs of obesity total $9.7 billion, of which $8.2 billion, or 85%, are incurred by obese or morbidly obese diabetics. Aggregate costs to insurers total $56.3 billion, of which $32.2 billion, or 57%, are due to obese or morbidly obese diabetics. Conclusion: Obese and morbidly obese diabetics account for a disproportionate share of health care costs among the obese population as a whole. Efforts to prevent diabetes in this population and to reduce diabetes among obese and morbidly obese individuals will lead to very substantial cost savings to insurers and consumers.