OBJECTIVE: To examine the cost-effectiveness of a community-based Diabetes Prevention Program (DPP) for Medicaid beneficiaries from the perspective of the health care sector. DATA SOURCES/STUDY SETTING: A total of 847 Medicaid enrollees at high risk for type 2 diabetes participating in a community-based DPP. STUDY DESIGN: Pre- and post clinical outcome and cost data were used as inputs into a validated diabetes simulation model. The model was used to evaluate quality-adjusted life years (QALYs) and health care costs over a 40-year time horizon from the perspective of the health care sector. DATA COLLECTION/EXTRACTION METHODS: Clinical outcome and cost data were derived from a study examining the effect of financial incentives on weight loss. PRINCIPAL FINDINGS: Study participants lost an average of 4.2 lb (p < .001) and increased high-density lipoprotein cholesterol by 1.75 mg/dl (p = .002). Intervention costs, which included financial incentives for participation and weight loss, were $915 per participant. The incremental cost-effectiveness ratio was estimated to be $14,011 per QALY but was sensitive to the time horizon studied. CONCLUSIONS: Widespread adoption of community-based DPP has the potential to reduce diabetes and cardiovascular-related morbidity and mortality for low-income persons at high risk for diabetes and may be a cost-effective investment for Medicaid programs.