Managed care (MC) refers to capitated practice (HMOs), utilization management (UM), and programs of case management for persons with mental illness and problems of substance abuse. These approaches differ substantially, and within each type are variations. Management of mental health and substance abuse services is increasingly prevalent, often sharply reducing costs. Savings result from reducing inpatient hospitalization and, sometimes, by substituting less expensive services for more costly ones. Most studies of managed care, however, measure costs narrowly, neglecting shifts in costs to patients, professionals, families, and the larger community. Strategies typical of HMOs and UM may result in lower-quality care for persons with serious mental illness and problems of substance abuse. Studies on this topic are reviewed, an analytic frame of reference is presented, and research needs are defined.