Despite advances in psychiatry, a proportion of those with mental illness have episodes of severe illness, and a few of these patients may attain only partial recovery. In this respect, mental illness is similar to physical illness and systems of acute and chronic care are essential. As mental health care financing and delivery systems undergo further flux and reform, we will require clear, consensually developed definitions of levels of care, especially because of the complexities created by a legacy of a 2-tiered, public and private mental health system. This paper first will offer definitions and examples of acute and chronic illness and care. We will also address certain problems inherent to such a classification. We will then consider principles of and potential plans for a system of financing and care for the chronically mentally ill. Two existing plans will be reviewed as illustrations of innovations in chronic care. As health reform changes the financing and delivery of care for the mentally ill, an opportunity exists to integrate public and private monies and services and to improve upon the care of the acutely and chronically mentally ill.