OBJECTIVE: To investigate factors associated with healthcare cost saving in patients with diabetes to the California Medicaid Populations (Medi-Cal). METHODS: A retrospective study was conducted by using claims data from January, 1995 to December, 2000. Dependent variable was total health care cost. Historical data including demographic factors, health care cost and utilization, diabetes drug treatment, follow-up services based on diabetic guidelines, medication compliance, complications, and comorbidities were used as independent variables. The generalized estimating equation method was used to analyze the panel data. RESULTS: Various factors have a significant association with health care cost savings to MediCal. Patients taking both insulin and oral hypoglycemic drugs or patients having drug dose increased had health care costs higher by $1210 and $141, respectively. Patients having oral hypoglycemic or insulin, anti-hypertensive, or lipid lowering drugs added also had health care costs higher by $264, $528, or $199, respectively. In addition, patients having drugs changed to different classes or to insulin had health care costs higher by $1018. However, patients having one percent of medication compliance increased had health care costs lower by $7 in next six-month period. Moreover, patients having office visits based on diabetic guidelines or patients having glucose monitoring strip had health care costs lower by $730 or $258 in next six-month period, respectively. In addition, patients having lab tests [e.g., HbA1C test every six-months ($121), cholesterol check up every year ($472), or dilated eye check-up every year ($260)] could lower costs in the future. CONCLUSIONS: Medi-Cal policy makers may implement some disease management programs or health policy on patients who have drug treatment problems and patients without follow-up services based on diabetic guidelines in order to improve patient outcomes and decrease health care costs in the future.