The study by a number of Welsh universities showed under-15s were five times more likely to need hospital care than non-diabetic children.
Academics said treating the condition was complex and "poor management" can lead to medical emergencies.
The Welsh government is working to improve the situation.
Type 1 diabetes is where the pancreas does not produce any insulin and it is more common in childhood than type 2, according to the NHS Choices website.
Experts from Cardiff University, Swansea University, the University of Bristol, Bangor University and Cardiff's University Hospital of Wales looked at the data of 95% of all young people in Wales with type 1 diabetes.
They said money should be spent on improving ongoing care with diagnosed cases rising 3-4% a year.
Prof Reinhard Holl, paediatric diabetologist from the University of Ulm, Germany, said: "Hospitalisation keeps children out of school and away from their families and friends.
"In addition, costs to the health care system are high, money which should be invested to improve continuous outpatient management and family support for those affected."
The Welsh government helped to fund the research, which studied 1,577 Welsh children with the condition.
It has launched a strategy, Together for Health - a Diabetes Action Plan, to improve health care.
"We have prioritised children's services in our diabetes delivery plan, and established an all Wales paediatric diabetes network, so that all 14 centres can share the latest research and ensure that they all deliver the same high quality care," a spokesperson added.
Ten-year-old Molly, from Wrexham, was diagnosed with Type 1 diabetes six months ago and since then she has become more anxious, according to her mother.
Malissa, 35, said her daughter was now less carefree.
She said: "Molly doesn't enjoy having her insulin injections and would gladly wish her condition away.
"She felt embarrassed at first and still feels different, especially when other kids have bigger snacks than her."
Asked if she was worried about her daughter having to go into hospital, she said "all the time".
"Because I know it's more of a possibility now - it's every parent's worse nightmare," she added.
Action to reduce the number of Welsh children with type 1 diabetes from being admitted to hospital is needed as cases continue to rise, experts warn.