This study investigates the factors that underlie large variation in Medicaid and Children's Health Insurance Program (CHIP) policies among states. Both eligibility and provider payment policies are examined for low-income children and parents. I find that state variation in the cost of providing health care, due to variation in the intensity of health care use, is a key determinant of eligibility policies, and I also find tentative evidence of an effect for payment policies. Because rising health care spending increases the cost of providing health insurance coverage, state policy makers in high-spending states enact less generous Medicaid and CHIP policies. Results also indicate that the political environments of states are very important in determining their eligibility policies, but fewer political variables influence payment policies. In addition to including variables not yet examined in the context of Medicaid policy, this study uses an innovative measure of state-level health care spending and carefully constructed dependent variables that lend credibility to causal interpretations of relationships.