OBJECTIVE: The study examined whether local variations in levels of community-based services affect the case mix of state hospitals undergoing census reduction. METHODS: Trends in case mix over a 14-year period were analyzed at two Massachusetts state hospitals, one of which underwent more rapid census reduction due to expanded community resources in the catchment area it served. Data on patients' hospital use and on sociodemographic and diagnostic characteristics obtained from 1977, 1986, and 1991 assessments of the hospitals' populations were compared. These time points represented the beginning, midpoint, and end of the census reduction period. Data from 1991 on patients' behavioral and functional status were also examined. RESULTS: Parallel trends on many dimensions were evident at the two hospitals as their censuses fell. By 1986 the hospital operating in the area with greater community services had fewer elderly and long-stay patients but a higher number of admissions per patient. In 1991 this hospital's population also had more patients with high-risk violent behaviors and lower levels of functioning. CONCLUSIONS: Although alternative treatment settings allow diversion of many types of patients from state hospitals, expanded community-based services and alternative inpatient beds have not diverted some patient subgroups, including recidivists and patients with behaviors that present risks in other settings. Plans for meeting the clinical needs and behavioral challenges posed by such patients must be part of any further deinstitutionalization or privatization efforts.