Neighborhood characteristics such as racial segregation may be associated with type 2 diabetes mellitus, but studies have not examined these relationships using spatial models appropriate for geographically patterned health outcomes. We constructed a local, spatial index of racial isolation (RI) for black residents in a defined area, measuring the extent to which they are exposed only to one another, to estimate associations of diabetes with RI and examine how RI relates to spatial patterning in diabetes. We obtained electronic health records from 2007-2011 from the Duke Medicine Enterprise Data Warehouse. Patient data were linked to RI based on census block of residence. We used aspatial and spatial Bayesian models to assess spatial variation in diabetes and relationships with RI. Compared with spatial models with patient age and sex, residual geographic heterogeneity in diabetes in spatial models that also included RI was 29% and 24% lower for non-Hispanic white and black residents, respectively. A 0.20-unit increase in RI was associated with an increased risk of diabetes for white (risk ratio = 1.24, 95% credible interval: 1.17, 1.31) and black (risk ratio = 1.07, 95% credible interval: 1.05, 1.10) residents. Improved understanding of neighborhood characteristics associated with diabetes can inform development of policy interventions.