Problem: Diabetic nephropathy (DN) is a common microvascular complication of diabetes and can result in end-stage renal disease (ESRD) necessitating long-term dialysis or kidney transplantation. The costs of these complications are relatively high. The aim of this study was to quantify and compare the rates and annual costs of DN in the USA and the UK. Methods: A cost of illness model was used to estimate the numbers of people with DN (microalbuminuria, overt nephropathy, and ESRD) or a previous kidney transplant at a given point in time and the numbers of new kidney transplants during a year. All costs were estimated in 2001 currencies. A sensitivity analysis assessed the robustness of the national annual cost estimates. Results: In the USA, the total annual medical costs incurred by all payers in managing DN were US$1.9 billion for Type 1 diabetes (range: US$1.0-2.8 billion), US$15.0 billion for Type 2 diabetes (range: US$7.6-22.4 billion), and US$16.8 billion for all diabetes (range: US$8.5-25.2 billion). In the UK, the total annual costs to the National Health Service (NHS) of managing DN were US$231 million (㱵2 million) for Type 1 diabetes (range: US$190-350 million [㱲5-230 million]), US$933 million (㶱4 million) for Type 2 diabetes (range: US$809 million-US$1.4 billion [㵳2-927 million]), and US$1.2 billion (㷶5 million) for all diabetes (range: US$999 million-US$1.8 billion [㶵7 million-㱮2 billion]). Conclusions: The total annual cost of DN is 13 times greater in the USA than in the UK. Controlling for the substantially higher number of people at risk, the total cost per person with DN and/or a kidney transplant is 40% higher: US$3735 in the USA and US$2672 (㱷58) in the UK.