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The objective of this study was to characterize health care costs associated with diabetic lower-extremity ulcers.Adult patients with diabetes who had a lower-extremity ulcer episode during 2000 and 2001 were identified using claims data. Ulcer-related direct health care costs were computed for each episode. Episodes were stratified according to severity level based on the Wagner classification.A total of 2,253 patients were identified. The mean age was 68.9 years, and 59% of the patients were male. The average episode duration was 87.3 ± 82.8 days. Total ulcer-related costs averaged $13,179 per episode and increased with severity level, ranging from $1,892 (level 1) to $27,721 (level 4/5). Inpatient hospital charges accounted for 77% ($10,188) of the overall cost, indicating that hospitalization was a major cost driver. Total ulcer-related costs were significantly higher for patients <65 years of age compared with those of older patients ($16,390 vs. $11,925, P = 0.02) and for patients with inadequate vascular status compared with patients with adequate vascular status ($23,372 vs. $5,218, P < 0.0001). Patients who progressed to a higher severity level also had significantly higher ulcer-related costs compared with patients who did not progress ($20,136 vs. $3,063, P < 0.0001).The high costs of treating diabetic lower-extremity ulcers emphasize the value of intensive outpatient interventions designed to prevent ulcer progression.