Objective; in 1990 the state of Arkansas shifted financial responsibility for state hospital services to community mental health centers; through a policy known as "bed buy-back," centers now authorize all state hospital admissions and prospectively purchase bed days for their patients. Characteristics of patients hospitalized before and after implementation of the policy were examined to determine how the policy affected hospital admission rates, types of patients admitted, and the amount of contact between CMHC and hospital staff about admitted patients, as well as how these elements were affected differently in rural and urban areas. Methods: Changes in the types of patients admitted over the 13 months before and 14 months after the change in financing were studied through retrospective chart review of 648 patients. Administrative data were used to examine changes in numbers of admissions for 30 months before and 26 months afterward. Data were analyzed by piecewise regression, leastsquares, and logistic regression analyses. Results: After financial decentralization, state hospital use was reduced in both urban and rural areas, although the reduction in urban areas was proportionally greater. Contrary to expectation, admissions were not limited to the most severely ill, disruptive, or substance-abusing patients, nor were they more likely to be readmitted. For patients who were admitted, communication between the community and the state hospital was greater than before financial decentralization. Conclusions: Shifting financial responsibility for patient care significantly reduced state hospital use, did not affect patient mix, and apparently increased coordination of care between community and hospital. Whether bed buy-back has affected the kind or quality of services delivered in the community awaits further study.