OBJECTIVE: To examine the relationship between pre-existing depression and incidence of type-2 diabetes. METHODS: Administrative claims data of a state Medicaid were used to meet the study objective. Medicaid enrollees with depression were identified in the year 1997 using ICD-9 codes for depression. A comparison group without depression was also identified in 1997. Enrollees with a medical/pharmacy claim for type-2 diabetes in 1997 were excluded from the analysis. Both these groups were then followed till December 31, 2002 to identify incident cases of type-2 diabetes. The analysis was restricted to patients who were continuously Medicaid eligible through the period 1997-2002. In addition to univariate chi-square analysis, logistic regression analysis was conducted to examine the association between depression and incidence of type-2 diabetes controlling for the effect of demographics and presence of co-morbidities. RESULTS: A total of 4472 eligible enrollees with depression were identified in the year 1997. The comparison group consisted of 5195 eligible non-depressed enrollees. A significantly higher fraction of depressed enrollees (15.7%) developed type-2 diabetes as compared to non-depressed enrollees (11.7%) (p<0.01). Results of the logistic regression demonstrated a significant interaction effect between gender and presence of pre-existing depression, suggesting that the odds of developing incident type-2 diabetes in enrollees with depression were significant only in females. Females with pre-existing depression were nearly one and a half times more likely to develop incident type-2 diabetes as compared to non-depressed females, after controlling for age, race, and cardiovascular co-morbidity at baseline (Odds Ratio = 1.479; p<0.01). CONCLUSION: The observed higher risk of type-2 diabetes among females with depression may suggest that physicians need to monitor diabetic metabolic changes in females with depression for early detection and treatment of type-2 diabetes.