OBJECTIVES: With advances in blood ketone testing methodology, diabetic patients can now monitor the predominant ketone body (beta-hydroxybutyrate) at home in addition to their standard glucose monitoring. This ketone monitoring may permit early detection and treatment of ketosis and diabetic ketoacidosis (DKA). This study compares the cost consequences of blood vs. urine ketone testing and of optimal vs. normal glycemic control in diabetes management. METHODS: First, a decision tree model was developed to estimate costs of testing ketone levels and managing acute metabolic complications for patients with insulin dependent diabetes mellitus (IDDM). Home blood ketone testing or urine ketone testing was utilized during patients' sick-day management. Second, a Markov process was applied to project progression of diabetic complications based on HbA1c levels over 5 years using the published Diabetes Control and Complications Trial data. Cost analyses in 2001 U.S. dollars were performed from the payer's perspective using data from published literature and applying a 3% discount rate. Assumptions were tested in one-way sensitivity analyses. RESULTS: In the base case, the decision tree model showed that blood ketone testing could prevent 7.2 DKA events per 1,000 IDDM patients per year, yielding a net savings of $51,982 compared to urine ketone testing, mainly due to reduced medical care costs for treating DKA, ketosis and hypoglycemia. In addition, the Markov model predicted that over 5 years, improved glycemic control as shown by lowered HbA1c levels from 9% to 7% could save $253,322 per 1,000 IDDM patients for treating diabetic complications, including $69,116 for retinopathy, $122,762 for nephropathy, and $61,444 for neuropathy. The results were robust in sensitivity analyses. CONCLUSIONS: Under a range of assumptions blood ketone testing could reduce ketosis and DKA events, thereby lowering medical expenditures. Potentially improved glycemic control through lowered HbA1c levels could decrease treatment costs for long-term diabetic complications.