The predominant approach to contracting state mental hospital systems has been to close individual hospitals. Such a policy creates conflict between state government and the affected workers and communities. Closing of hospitals has been motivated by an implicit assumption on the part of state policymakers that there are increasing returns to scale in mental hospitals. The bulk of empirical evidence suggests that returns to scale are constant. Thus, in many cases one may forego the political conflict inherent in closing hospitals by shrinking them with no loss in economic efficiency.