Although deinstitutionalization has been linked with an increase in the number of mentally ill people who are homeless or in jails, several demonstration programs started during the past 30 years have shown that community-based services for the seriously mentally ill can be both humane and cost-effective. Four such programs, none of which has been widely implemented or has significantly influenced service delivery systems, are described. The author contends that the cbaotic and illogical funding system for mental health services is primarily responsible for failure of the widespread implementation of demonstrably effective programs. The economic disincentives of the present system include lack of coordination of services at the state and local level and federal policies that favor hospitalization, restrict payment for outpatient and rehabilitation services, and discourage mentally ill persons from working. The author suggests that public services for the mentally ill are unlikely to improve significantly until such disincentives are addressed.