OBJECTIVES: Type 2 diabetes mellitus is a common, chronic and costly disease. Its prevalence is rapidly increasing worldwide. Diabetes has big economic burden mainly because of its chronic complications. We analyzed the annual direct medical costs of type 2 diabetic patients, including the costs associated with its complications in Korea retrospectively. METHODS: We enrolled 531 type 2 diabetic patients who had been treated in the 3 Tertiary Hospital in 2005. Clinical characteristics, duration of diabetes, modality of glycemic control, and presence of microvascular and macrovascular complications were assessed by the review of medical records. The annual direct medical costs were assessed using the hospital electronic database and included insurance covered and uncovered medical costs. RESULTS: The annual direct medical costs of type 2 diabetic patients without any complications was $1184 (95% CI for mean: $973 - $1396). Compared to diabetic patients without complications, annual total medical costs increased 4.7-fold, 10.7-fold, and 8.8-fold in patients with microvascular complications, macrovascular complications and both complications, respectively. Hospitalization costs largely increased by 78.7-fold and 61.0-fold in patients with macrovascular complications and both complications, respectively. Major complications to increase medical costs were kidney transplantation (23.1-fold), dialysis (21.0-fold), PTCA or CABG (12.4-fold), and leg amputation (11.8-fold). The total medical costs dramatically increased according to the stage of diabetic retinopathy and nephropathy. CONCLUSIONS: Diabetic complications have a substantial impact on the direct medical costs of type 2 diabetic patients. The prevention of diabetic complications will benefit the patients as well as the overall healthcare expenditures.