OBJECTIVE: States finance some community-based mental health services through purchase-of-service contracts. The study examined ways in which six states monitor these contracts. METHODS: Data were gathered during site visits to Massachusetts, Michigan, New York, Oregon, Tennessee, and Texas, where more than 100 state policy makers, providers, consumers, and advocates were interviewed about mental health purchase- of-service contracting. Relevant documents about contracting practices for mental health services in each state were also examined. RESULTS: Findings suggest that states monitor their mental health contracts in two ways. First, long-term contracts are monitored using traditional methods, focusing on the structure and process of delivering services. Newer contracts for specific services are more likely to be monitored using performance measures currently being developed. States have had difficulty creating and implementing performance-based contracting for publicly funded mental health services. CONCLUSIONS: It is likely that contracting will continue to be the method states use for future policy initiatives. It may be more appropriate for policy makers to set their sights on developing a simplified set of outcome measures that will give them some information about provider performance, even if the information is imperfect.