Background Outpatient reimbursement levels of the New Rural Cooperative Medical Scheme have changed in recent years in China, and those changes may have a greater impact on patients with chronic diseases due to their higher outpatient expenses. This study represents the first attempt to identify the effects of reimbursement level on outpatient service utilization for chronic patients in rural China and it also gives strong estimation results by conducting a tracer illness study in order to control for possible biases associated with studying several diseases together. Methods This study used difference-in-differences models to examine how changes in yearly maximum reimbursement amount and outpatient reimbursement rates affected rural residents with type 2 diabetes in three counties in Jiangsu Province, China. Other factors, such as sex, age and severity of illness, were also included in the model estimations. To make sure the treated group and control group are comparable, Propensity Score Match (PSM) was used to analysis the gender, age and severity of illness of the two groups. Results The results indicate that an increase in yearly maximum reimbursement amount for outpatient visits could cause an increase in yearly total outpatient expenses for patients with type 2 diabetes mellitus. However, changes in outpatient reimbursement rates between 2010 and 2011 did not significantly affect the utilization of different types of health institution. Conclusions The reimbursement rates of village clinics should be substantially increased from the existing basis and the gap of reimbursement rates among different institutions should be further widened. It is also important for village clinics to improve their services. Moreover, measures to improve the quality of care and scope of services at lower-level healthcare institutions, and promote the health service utilization of rural women should be considered.