This study demonstrates how inefficient health care spending and politics affect state Medicaid and Children's Health Insurance Program (CHIP) policies for low-income children and parents. First, researchers have documented large geographic variation in medical spending that is unrelated to quality of care or patient characteristics. Because this inefficient medical spending increases the cost of providing health insurance coverage, state policymakers in high spending states enact less generous Medicaid/CHIP policies. My results show that inefficient medical spending leads to less generous Medicaid/CHIP eligibility rules and less generous provider payments for Medicaid/CHIP patients. Second, I investigate the effects of political environments in states on Medicaid/CHIP generosity. I find that party control of the state legislature and governorship, state resident ideology, women in state legislatures, and the line-item veto are important factors in explaining state Medicaid eligibility generosity. In contrast, the generosity of state Medicaid provider payments is better explained by the strength of interest groups representing physicians. This study uses a sophisticated research design and improved variable measures to control for omitted variables, lending more credibility to causal interpretations of results. State fixed effects are used to control for unobserved state characteristics that are fixed over time. Unique dependent variables measuring Medicaid/CHIP generosity are constructed to minimize potential omitted variables bias and provide direct measures of policy.