CHIP is a block grant program in which the federal government makes a capped amount of new funding available for each fiscal year. This capped funding is divided annually among the states into state-specific allotments, determined by a formula set out in the law.

CHIP funds generally must be used to provide coverage to uninsured, low-income children who do not qualify for regular Medicaid. States also can use a limited amount of funds for administrative costs and other non-coverage initiatives, such as outreach.

The federal government pays for 65% to 82% of each state's CHIP initiatives (depending on the state). The match rate is based on the regular Medicaid match rate, but is significantly higher.

Unlike Medicaid the amount that a state can draw down for CHIP is capped. States facing funding shortfalls can obtain additional funding through a child enrollment contingency fund and allotment increases are available for states with approved plans to expand eligibility or benefits.