Deinstitutionalisation (or deinstitutionalization) is the process of replacing long-stay psychiatric hospitals with less isolated community mental health services for those diagnosed with a mental disorder or developmental disability. In the 1950s and 1960s, it led to the closure of many psychiatric hospitals, as patients were increasingly cared for at home, in halfway houses, group homes, and clinics, in regular hospitals, or not at all.

Deinstitutionalisation works in two ways. The first focuses on reducing the population size of mental institutions by releasing patients, shortening stays, and reducing both admissions and readmission rates. The second focuses on reforming psychiatric care to reduce (or avoid encouraging) feelings of dependency, hopelessness and other behaviours that make it hard for patients to adjust to a life outside of care.

The modern deinstitutionalisation movement was made possible by the discovery of psychiatric drugs in the mid-20th century, which could manage psychotic episodes and reduced the need for patients to be confined and restrained. Another major impetus was a series of socio-political movements that campaigned for patient freedom. Lastly, there were financial imperatives, with many governments also viewing it as a way to save costs.

The movement to reduce institutionalisation was met with wide acceptance in Western countries, though its effects have been the subject of many debates. Critics of the policy include defenders of the previous policies as well as those who believe the reforms did not go far enough to provide freedom to patients.

The 19th century saw a large expansion in the number and size of asylums in Western industrialised countries. In contrast to the prison-like asylums of old, these were designed to be comfortable places where patients could live and be treated, in keeping with the movement towards "moral treatment". In spite of these ideals, they became overstretched, non-therapeutic, isolated in location, and neglectful of patients.

By the beginning of the 20th century, increasing admissions had resulted in serious overcrowding, causing many problems for psychiatric institutions. Funding was often cut, especially during periods of economic decline and wartime. Asylums became notorious for poor living conditions, lack of hygiene, overcrowding, ill-treatment, and abuse of patients; many patients starved to death. The first community-based alternatives were suggested and tentatively implemented in the 1920s and 1930s, although asylum numbers continued to increase up to the 1950s.

The eugenics movement started in the late 19th century, but reached the height of its influence between the two world wars. One stated aim was to improve the health of the nation by 'breeding out defects', isolating people with disabilities and ensuring they could not procreate. Charles Darwin's son lobbied the British government to arrest people deemed as 'unfit', then segregate them in colonies or sterilise them.

At the same time, in Germany medics and lawyers joined forces to argue for the extermination of people with disabilities. The 1920 essay, "Permitting the Destruction of Life Unworthy of Life" is seen by many as a blueprint for the Nazis' future crimes against humanity.