Objectives. To analyse the short-and long-term costs and benefits of alternative models of primary care for the management of patients with type 2 diabetes in Australia. The models of care reflect differential uptake of primary care-based incentive programs, including reminder systems and involvement of practice nurses in management. This paper describes our study protocol and its progress. Methods. We are undertaking an observational study using a cluster sample design that links retrospective patient data from a range of sources to estimate costs and intermediate outcomes (such as the level of glycosylated haemoglobin (HbA1c)) over a 3-year time horizon. We use the short-term data as a basis to estimate lifetime costs and benefits of alternative models of care using a decision analytic model. Initial report. We recruited 15 practices from a metropolitan area (Adelaide) and allocated them to three models of care. Three hundred and ninety-nine patients agreed to participate. We use multilevel analysis to evaluate the association between different models of care and patient-level outcomes, while controlling for several covariates. Discussion/conclusions. Given the large amount of funding currently used to maintain primary care-based incentives in general practices in Australia, the results of this study generate the knowledge required to promote investment in the most cost-effective incentives. What is known about the topic? Collaborative models of care can improve the outcomes in patients with chronic diseases such as type 2 diabetes (T2D), and the large amount of funding is currently used to maintain primary care-based initiatives to provide incentives for general practices to take a more multidisciplinary approach in management of chronic diseases. What does this paper add? There are few model-based studies of the cost-effectiveness of alternative models of care defined on the basis of the uptake of financial incentives within Australian primary care settings for diabetes management. Using routinely collected data, this project evaluates the effectiveness of alternative models of care and estimates long-term costs and benefits of various models of care. What are the implications for practitioners? This study explores opportunities for the use of linked, routinely collected data to evaluate clinical practice, and identifies the optimal model of care in management of patients with T2D, with respect to differences in long-term costs and outcomes.