The psychiatric hospital is a total institution, and has a unique impact on the process of insight-oriented psychotherapy. Many of the basic characteristics of therapy, central for its contractual and noncoercive nature, are violated: voluntarily, undivided loyalty (including confidentiality and exclusivity), and non-directiveness. It is harder to form a therapeutic alliance, and to differentiate resistance from reality influences. The boundaries of therapy are changed, with specific impact on transference and countertransference, including mutual countertransference reactions among staff. Parallel phenomena can be observed in other total institutions, and in the practice of group and family therapy within the institution. While these dilemmas are inevitable in any hospital setting, a functioning therapeutic community, encouraging their open exploration, may alleviate some of their destructive impact.