OBJECTIVES: To examine whether depression treatment is associated with healthcare expenditures among Medicaid beneficiaries with Type 2 Diabetes Mellitus (T2DM) and newly-diagnosed depression.   METHODS: A retrospective longitudinal repeated measures cohort design was used.Multi-year (2000-2008) three-state Medicaid data were used.The cohort included non-elderly, fee-for-service, continuously enrolled Medicaid beneficiaries with T2DM and newly-diagnosed depression (N=5,295).The depression diagnosis date was the “index-date”; baseline and follow-up periods were defined as 12-months prior and subsequent to the index-date.Depression treatment received in 120 days after index-date was categorized as, treatment with antidepressants only,psychotherapy only,both antidepressants and psychotherapy and no treatment.Total healthcare expenditures were calculated for each follow-up month.Linear mixed effects regressions on log transformed total expenditures were used to examine associations between depression treatment and monthly healthcare expenditures after adjusting for random intercept and fixed effects of time in months, depression treatment , types of co-existing chronic physical conditions (hierarchically classified based on their similarity to T2DM pathophysiology and/or management into dominant,concordant only,discordant only and both concordant and discordant), gender, age, race/ethnicity, other mental health conditions, Medicaid eligibility due to poverty/medical need/waiver (yes/no), baseline healthcare utilization and county of residence characteristics such as presence of healthcare infrastructure( e.g.community mental health care clinic) and social determinants of health (e.g.county median income).  RESULTS: Overall,57% had depression treatment (antidepressants only:27.3%, psychotherapy only:18.1% and both:11.4%). The average yearly expenditures were $30,590 for antidepressants only, $35,099 for psychotherapy only, $33,032 for both and $34,041 for those receiving no depression treatment. Adjusted linear mixed model analysis revealed that as compared to no depression treatment, depression treatment with antidepressants only, psychotherapy only and by both antidepressants and psychotherapy reduced total healthcare expenditures by 17%(p-value<0.001), 22%(p-value<0.001)  and 28%(p-value<0.001) respectively. CONCLUSIONS: Depression treatment reduced healthcare expenditures suggesting that among individuals with T2DM who develop depression, prioritizing treatment for depression can result in economic benefits