Systems of long-term care for the mentally ill have been largely shaped by financing and reimbursement, rather than sound treatment principles. An undue emphasis on institutional care and the lack of coordination among providers can be attributed to perverse economic incentives and multiple payers. This article argues that, because of the special nature of long-term psychiatric disabilities, there is a predictable underutilization of long-term psychiatric services. It considers three types of settings: state hospitals, nursing homes, and community care, discussing current financing mechanisms in each. Finally, it presents characteristics of ideal systems and examines several proposedfinancing models according to these characteristics.This article argues that long-term care of the mentally ill needs special attention. For several reasons, it cannot be assumed that financing and reimbursement methods that work in one way with medical long-term care patients will operate in a similar way for psychiatric patients. Specifically, the nature of the chronic mentally ill, characteristics of the providers of care, and political forces all lead to a predictable tendency toward underutilization of long-term psychiatric services. The economic incentives of various financing and reim-