Magister Economicae - MEcon / The provision of health care in South Africa is undergoing major restructuring. The aim is to achieve substantial, visible and sustainable improvements to the efficiency and accessibility of primary healthcare (PHC) services for all South Africans. One of the country's most critical problems is the weak and fragmented public sector PHC system. The most critical problems contributing to this are the maldistribution of resources (financial, physical and human) between hospitals and the primary care system, and between rural and urban areas. The health sector, therefore, faces the challenge of a complete restructuring and transformation of the national health care delivery system and related institutions. Choices need to be made about which services to cut, which to streamline and where savings can be made. Ways need to be found to use ALL of South Africa's resources optimally. This process of restructuring would be facilitated by the availability of accurate information on resource utilisation in the health sector. This study estimates the difference in the cost of primary diabetes treatment at dayhospitals and a provincial hospital in the Western Cape in 1992/93. Health economics is in its infancy in South Africa and serious data limitations exist. This study is therefore a pioneering effort in many ways. An appropriate methodological framework in which to conduct the costing had to be developed. The South African health sector, health spending arid the cost of primary diabetes treatment at day-hospitals and the provincial hospital are reviewed. Theoretical perspectives of the health care market and the methodologies of cost analysis are discussed. The cost analysis method of study is chosen, and arguments are advanced for its suitability in the South African context. A simple method of calculating the direct costs to obtain the average cost is proposed for the purpose of the study. Direct costs consist of staff costs and other related costs, such as medical supplies, non-medical supplies, building operations, equipment etc. These costs are then used to calculate the average costs per diabetic patient at the day-hospitals and the provincial hospital. The average cost per diabetic patient at day-hospitals amounted to R18.76, while at the provincial hospital the cost was R59.60.