Many concerns have been raised about the special problems of providing care for severely mentally ill persons in a reformed health care system based on managed competition. The authors describe what will likely be basic features of the reformed system and discuss potential problems in serving this population. The authors recommend the development of special mental health maintenance organizations (MHMOs) that would serve only persons with severe mental illness. The MHMO would emphasize case management in the community and would provide a fixed point of responsibility for clinical care of these patients. Two methods of reimbursing MHMOs are proposed. Each region's health insurance purchasing cooperative ( HIPC) could reimburse the MHMO on a capitated risk-adjusted basis. Alternatively, HIPCs could require the general health plan to operate or contract for MHMOs. In each case, the HIPC would provide quality-of-care oversight and assign a team to act as a gatekeeper for referrals to the MHMO.