OBJECTIVE: The effects of the first 18 months of implementation of the Kansas Mental Health Reform Act were evaluated. The act designated community mental health centers as gatekeepers for admission to mental health services, created screening and diversion services for state hospital admission, allocated state hospital bed days to each center, and reallocated funds from hospitals to communities. METHODS: Data from the catchment area in which reform was implemented in the 18-month study period, January 1991 to June 1992, were compared with data for that area before reform, and with data for the two state hospital catchment areas in which reform was not yet implemented. RESULTS: In the catchment area in which reform was implemented, state hospitalization decreased by about 29 percent, and state mental health funds allocated to the area's mental health centers almost doubled. Service utilization by patients discharged from the state hospital was higher than in the other two catchment areas, and most indicators of living status and vocational or educational involvement reflected improvement. CONCLUSIONS: The first 18 months of implementation suggest that state-level systems change can decrease state hospitalization and improve the utilization of community services while improving the quality of life for people with severe and persistent mental illness.