OBJECTIVES: Type 2 diabetes is the main cause of end-stage renal disease (ESRD) in Europe and the USA. Angiotensin-converting enzyme (ACE) inhibitors slow down the progression of renal disease and therefore provide a renal-protective effect. The aim of our study was to assess the most cost-effective time to start an ACE inhibitor (or an angiotensin II receptor blocker (ARB) if coughing as a side effect occurs) in patients with newly diagnosed type 2 diabetes in the Netherlands.  METHODS: Three strategies were compared: treating all patients at the time of diagnosing type 2 diabetes, screening for microalbuminuria, and screening for macroalbuminuria. A lifetime Markov decision model with simulated 50-year-old patients with newly diagnosed diabetes mellitus was developed using published data on costs and health outcomes and simulating the progression of renal disease. A health insurance perspective was adopted.  RESULTS: In the base-case analysis, the treat-all strategy is associated with the lowest costs and highest benefit and therefore dominates screening both for macroalbuminuria and microalbuminuria. A multivariate sensitivity analysis shows that the probability of savings is 70%. Treating all patients with an ARB would also be a dominant strategy despite the fact that ARBs are a much more expensive alternative.  CONCLUSIONS: Patients with type 2 diabetes should receive an ACE inhibitor immediately after diagnosis if they do not have contraindications. An ARB should be considered for those patients developing a dry cough under ACE inhibitor therapy. The potential for cost savings would be even larger if the prevention of cardiovascular events were considered.