Background <p>Despite the global target of 80% glycemic control among people diagnosed with diabetes in 2030, diabetes treatment coverage and control rate were still low. Diabetes imposes a substantial economic burden on health systems, patients, and their families. Due to low health insurance coverage in developing countries, the expenses related to diabetes care often result in significant out-of-pocket costs for patients.</p> Objective <p>To assess the level of out–of–pocket expenditure and the effect of community-based health insurance (CBHI) on out-of-pocket (OOP) expenditure among diabetic patients on follow-up at Hawassa Comprehensive Specialized Hospital, Sidama region.</p> Method <p>A facility-based comparative cross-sectional was conducted among 314 randomly selected adult type 2 diabetics. Kobo Collect app and SPSS version 26 were used data collection and analysis respectively. Independent sample t-test and linear regression were used to compare OOP expenses between CBHI members and non-members, and assess the association between CBHI-enrollment and OOP expenses.</p> Result <p>The average monthly household expenditure among participants was 6,471.52 Ethiopian Birr (ETB) (SD ± 3,275.47). Of which, average monthly costs of 3,568.55 ETB for food and 2,902.97 ETB for non-food items. The average monthly expenditure for diabetic illness was 2,046.00 ETB (SD ± 3,173.50), of which 869.67 ETB (42.5%) were direct medical costs. Regarding incidence and severity of catastrophic health expenditure (CHE), 82.5% of patients faced CHE at the 10% threshold, while only 27.4% did so at the 40% threshold. The intensity of OOP was 67 (43.2%), and 120 (75.5%) among CBHI members and non-members, respectively (<i>p</i> = 0.000). The CBHI enrollment is significantly associated with a reduction in OOP expenses, with a coefficient of -499.410 (<i>p</i> = 0.000). Similarly, age and occupation of participants were associated with lower OOP expenses, with a coefficient of -8.756 (<i>p</i> = 0.028) and − 58.221 (<i>p</i> = 0.002), respectively. Educational status of participants was associated with higher OOP expenses, with a coefficient of 104.416 (<i>p</i> = 0.004). However, marital status, household size, and wealth percentile group did not have a significant effect on OOP expenses among diabetic patients.</p> Conclusion <p>A significant proportion of diabetes patients experienced CHE. Enrollment in CBHI lowered OOP costs and reduced CHE. But there are still gaps in CBHI coverage, especially when it comes to the lowest and middle wealth quantiles. To enhance CBHI effectiveness, it is important to prioritize rural and low-income households to reduce financial strain. Introduce a subsidy program to make diabetes medications more affordable for uninsured households. Incorporate beneficiary feedback to refine policies and address the diverse needs of enrollees. Future research to evaluate the long-term impacts of CBHI on diabetic patient expenses on household financial stability by involving hospitals from rural and urban sectors is important to better understand the effect of CBHI on OOP expense and catastrophic health expenditure in the region.</p>