In 1869, the 6th Montana Territorial Legislative Assembly passed a law authorizing an official territorial insane asylum to be owned and managed on a contract basis by private parties. A board of commissioners was established with one representative from each judicial district to oversee the asylum, establish rules for its operation, and perform periodic inspections. Until 1877, St. John's Hospital in Helena served as the territorial asylum. By 1874, it was accepting sufficient numbers of patients committed by Governor Benjamin Potts to require the construction of a separate building behind the main hospital.

In 1877, Dr. Armistead H. Mitchell (1831-1898) and Dr. Charles F. Mussigbrod (d.1893), owners of a hotel and spa at Warm Springs, Montana, were awarded the contract for the care of the territory's mental patients. By 1886, the partners had expanded their operation from 160 acres to 1,640 acres and from 2 buildings to 32 buildings, including a larger hotel, a house for convalescents, a separate building for violent patients, a large plunge pool, a laundry, storehouses, ice houses, and many other outbuildings. From 1891 to 1907, the hospital was run by Dr. O.Y. Warren, who was in turn succeeded by Dr. J.M. Scanland, son-in-law of Dr. Armistead H. Mitchell. Under private operation, the asylum continued to operate the hotel and run a large farm, specializing in pedigreed cattle.

In 1910, a constitutional amendment was passed allowing the state to acquire the asylum. On December 1, 1912, the Warm Springs hospital became a state institution. Dr. Scanland continued as superintendent. In 1917, the governor appointed a special commission to investigate charges of gross mismanagement and corruption at the hospital. The hospital management was exonerated of all charges. Gradually, under state operation, the emphasis changed from a custodial asylum to a hospital, as more modern procedures were adopted, but efforts were hampered by low funding. Care costs in 1938 of $.60 per day per patient were the lowest in the nation. As concepts of treatment of mental patients changed, the average patient load dropped dramatically from a high of over 1,900 in the early 1950s to 1,112 in 1972. Numbers of admissions per year were higher, but average length of stay was much shorter. The hospital operated under a variety of names including Mitchell and Mussigbrod, Insane Asylum of the State of Montana, Montana State Hospital for the Insane, Montana State Insane Asylum, Montana State Hospital, and Warm Springs State Hospital.