Abstract: The objective of this study is to estimate the direct costs and downstream savings of improved quality of diabetes services, compared to usual care, in the primary care setting in a high-risk remote Indigenous Islander population. The study looked at cost impact analysis over six years (2000-2005) comparing costs of quality improvement with actual and projected savings in avoidable diabetes-related hospitalisations. Costs of service provision were derived from district financial reports, costs of diabetes-related complications requiring hospitalisations were estimated from actual admission data and costed using published Diagnosis-Related Group costings in Australian dollars (year 2000). Net present value cost of the quality improvement intervention was estimated using a 5% discount rate. A district health service in remote northern Australia, with 9,600 mainly Indigenous residents, including 1,000 adults with known diabetes served by 21 primary care centres and two hospitals, was the study population and setting. The main outcome measures are the costs of a quality primary level diabetes service and hospitalisations among people with diabetes for infections and other acute complications, lower limb amputations, end-stage renal disease and cardiovascular disease. Over the six years, a net present value cost of $570,000 is estimated for the new service. This is equivalent to A$1,800 for each major event avoided. After four years of initiation, annual cost savings exceed annual program delivery costs. It is concluded that, in this remote Indigenous population with high prevalence of diabetes and associated complications, investment in quality improvement in primary diabetes care using a chronic disease model will achieve cost savings through prevention of expensive diabetes-related hospitalisations.