Although there is broad consensus that people with serious mental illnesses (SMI) are overrepresented in correctional settings, there is less agreement about the policy trends that may have created this situation. Some researchers and policymakers posit a direct link between deinstitutionalization and increased rates of SMI in jails and prisons, a phenomenon described as transinstitutionalization. Others offer evidence that challenges this hypothesis and suggest that it may be a reductionist explanation. This paper reviews claims from both sides of the debate, and concludes that merely increasing access to state psychiatric hospital beds would likely not reduce the number of people with SMI in jails and prisons. A more nuanced approach is recommended for explaining why people with SMI become involved in the criminal justice system and why developing effective strategies to divert them out of jails and prisons and into community-based treatment is needed to improve both their mental health and criminal justice outcomes.