NSW recorded the biggest increase, with 20 per cent more patients admitted to hospital due to type two diabetes in 2015 compared to 2013, according to statistics collected by Medibank on its members.

The growth in admissions was as high as 42 per cent in Sydney's central suburbs, compared to a national average increase of 15 per cent.

Medibank chief medical officer Linda Swan said the figures sent a clear signal to the health fund that it needed to staunch the spiralling cost of type two diabetes.

"We've been hearing about the epidemic of diabetes for years, but it's not until you see the stark reality that you see this is growing at an extraordinary rate and clearly we're not doing enough," Dr Swan said.

Medibank sponsors the Stephanie Alexander Kitchen Garden program that teaches children about healthy eating in schools, and also runs a program that identifies people with chronic diseases who are at high risk of hospitalisation and gives their GPs additional support.

Dr Swan said most type two diabetes hospital presentations were avoidable, but the quandary was how to prevent them in the most efficient way.

"We're seeing in Australia an ageing population and an increasing number of people with chronic disease and obviously that's driving the cost of health care, but what we're hearing from our members is they don't want to pay more for health care.

"That's the challenge our industry faces."

Diabetes Australia chief executive Greg Johnson said the disease threatened to overwhelm the viability of the national health system, with 4400 amputations performed in hospitals each year and 10,000 admissions due to ulcers and foot sores, many of them preventable.

"Diabetes is a very significant driver of hospitalisations when you look at all of the complications," Professor Johnson said.

"I think health insurers are very worried because they're substantial funders of the hospitals.

"People with diabetes are potentially big costs to them and they're starting to wake up to that and do programs that keep people healthy."

Insurers are not allowed to charge people different premiums based on their health status and they cannot refuse to insure any individual.

The Primary Health Care Advisory group recommended last year that private insurers be encouraged to fund the prevention and management of chronic conditions, possibly through the risk equalisation pool that is used to compensate health funds with the sickest patients.

Many funds provide schemes to reward healthy lifestyles such as subsidised gym memberships.

Blacktown endocrinologist Glen Maberly cautioned against using hospital admissions as a measure of the growth in diabetes since not all patients were classified as diabetics when admitted.

This meant that the real figure may be higher and geographical discrepancies were unreliable.

About a third of people with type two diabetes were undiagnosed, he said.

"Most people being admitted to hospital are not being admitted for diabetes," Professor Maberly said.

"They're coming in for other reasons, both the co-morbidities that diabetes causes – heart attack, stroke – and all the complications that are largely unavoidable if the diabetes was well managed over the years leading up to the current situation."

As part of the Western Sydney Diabetes initiative, endocrinologists are working with general practitioners to identify and manage diabetics through case conferences, which can have a significant effect on patients' blood sugar levels after as little as one visit, he said.