The Veterans Health Administration (VA) established psychosocial residential rehabilitation treatment programs (RTPs) to treat eligible veterans who have psychiatric and substance use disorders in a less intensive and more self-reliant inpatient setting. Fortytwo (25 percent) VA medical centers adopted RTPs in 1995. Panel regression models using data from 1993 through 1999 indicated that RTPs were associated with 8.6 and 24.4 percent decreases in the average cost per day for inpatient psychiatry and substance use care, respectively. During this time, VA transitioned much of the inpatient mental health care to ambulatory services. Yet medical centers with RTPs had smaller decreases in the number of inpatient patient days than those without RTPs. Because medical centers with RTPs provided more services, this offset the per diem savings, resulting in no significant differences in total costs between medical centers with and without RPTs.