OBJECTIVES Despite the recent increase in incidence and prevalence of Type-2 diabetes mellitus (T2DM) in Hong Kong, the economic impact of the disease has never been investigated. This study aims to estimate the total economic burden of a group of T2DM patients attending a public hospital in Hong Kong using a prevalence-based cost-of-illness approach. METHODS A retrospective cohort observational study was conducted. The direct medical costs incurred at the public hospital were collected from a hospital electronic database. The other costs were estimated using a standard Chinese questionnaire. The figures obtained were extrapolated to estimate the total burden for the whole T2DM population in Hong Kong. The study was conducted from the perspective of a public hospital. RESULTS Two hundred and four patients with T2DM were randomly selected to join this study and 147 were subsequently enrolled. Annual total direct medical cost per patient was US$1492 in which the government was shouldering 90.6%, while the patients only paid for the remaining 9.4%. Among these, specialist outpatient clinic visit costs and inpatient costs were the major cost drivers, which contributed up to 39.6% and 43.0% of the overall cost, respectively. The direct medical cost jumped dramatically, by 1.3 times, if the patient had complications. The total government direct medical cost for those without complication was US$1254/patient/year, which would jump to US$1692 for patients developing both microvascular and macrovascular complications. T2DM was found to have significant impact to the local health care budget. It contributed to about 5.0% of the total Hong Kong health care expenditure. CONCLUSIONS This study confirmed T2DM and its complications pose a significant burden on the health care budget of Hong Kong. Slowing the progression of the disease to the more advanced and costly states should be cost saving.