Abstract Background Diabetes is associated with premature death and a number of serious complications. The presence of comorbid depression makes these outcomes more likely and results in increased healthcare costs. The aim of this work was to assess the health economic outcomes associated with having both diabetes and depression, and assess the cost-effectiveness of potential policy changes to improve the care pathway: improved opportunistic screening for depression, collaborative care for depression treatment, and the combination of both. Methods A mathematical model of the care pathways experienced by people diagnosed with type-2 diabetes in England was developed. Both an NHS perspective and wider social benefits were considered. Evidence was taken from the published literature, identified via scoping and targeted searches. Results Compared with current practice, all three policies reduced both the time spent with depression and the number of diabetes-related complications experienced. The policies were associated with an improvement in quality of life, but with an increase in health care costs. In an incremental analysis, collaborative care dominated improved opportunistic screening. The incremental cost-effectiveness ratio (ICER) for collaborative care compared with current practice was ÂŁ10,798 per QALY. Compared to collaborative care, the combined policy had an ICER of ÂŁ68,017 per QALY. Conclusions Policies targeted at identifying and treating depression early in patients with diabetes may lead to reductions in diabetes related complications and depression, which in turn increase life expectancy and improve health-related quality of life. Implementing collaborative care was cost-effective based on current national guidance in England.