Background: Observational studies from the USA have suggested that patients with low health literacy (HL) have higher health care costs and use an inefficient mix of health care services. To date, there were no studies from Europe that investigated the impact of HL on the use of the health system. The purpose of this study was to measure functional HL among persons having type 2 diabetes and to investigate the relationship between functional HL and health care costs and utilization. Methods: The study population were insured persons of the basic health insurance plan of the largest health insurer in Switzerland. Persons selected for participation had been reimbursed for diabetes medications in 2010-11, were aged 35-70 years and did not live in a long-term care institution. The level of functional HL was measured by one screening question. The following dependent variables were used: total costs, outpatient costs, inpatient costs, days admitted and number of physician visits attended. All multiple regression analyses were adjusted for age, gender, education, duration of diabetes, treatment with insulin (yes/no) and other chronic disease (yes/no). Results: High levels of functional HL were associated with lower total costs (P = 0.007), lower outpatient costs (P = 0.004) and less physician visits (P = 0.001). In the standard insurance plan with free access to all health professionals subgroup, the effects found were more pronounced. Conclusions: Persons with low functional HL need extra medical support, and therefore have higher health care costs.