Despite the high prevalence of chronic medical conditions among youth in child welfare, there is a paucity of research examining placement stability and frequency of medically-related hospitalizations for this vulnerable subpopulation. These questions are explored, with an emphasis on understanding the impact of initial living arrangement on each outcome. This study assessed 945 youth (ages 5–17) in out-of-home care within the Illinois child welfare system, using a matched sample of youth with (n = 318) and without (n = 627) a chronic medical illness. Placement stability and number of medically-related hospitalizations were compared between the two groups. Additionally, negative binomial regressions were used to assess the relationship between participant characteristics, type of living arrangement, and both placement stability and medically-related hospitalizations. Placement stability was not associated with having a chronic medical illness. However, stability was associated with initial living arrangement, with youth in kinship care having a lower likelihood of subsequent placement changes than youth in foster care or residential placements. Number of medically-related hospitalizations was significantly associated with having a chronic medical illness. Number of medically-related hospitalizations was also associated with type of initial living arrangement: kinship care showed a lower likelihood of hospitalizations than foster care or residential placements. Results provide preliminary evidence that kinship care should be prioritized for youth with a chronic medical illness over placement in foster care or residential settings, as kinship care showed higher placement stability and lower rates of medically-related hospitalizations for youth with chronic medical illness.