It will take a decade and up to $600 million to close Western Australia's biggest and century-old psychiatric facility, and provide modern replacement services across the state.
Graylands Hospital, on prime land in Mount Claremont, has long been widely criticised for being outdated and overcrowded.
The state government on Wednesday revealed it would develop new mental health facilities in the regions, within prisons and also at the Graylands site, but it would take up a much smaller footprint than the existing complex.
The remainder of the land will be sold off.
"There is no excuse in this day and age for people to have to travel from long distances to get to a facility like Graylands in Perth from say, the Pilbara or somewhere like that," Mental Health Minister Helen Morton said.
She said there would also be a long-needed focus on providing community-based services.
Ms Morton said WA had the nation's highest level of specialist mental health staff and cost per capita, but the lowest level of patient contact with community mental health services.
She said the state also had the lowest level of Medicare-subsidised mental health services, which meant GPs weren't able to offer much support.
"Their only option seems to be if they get particularly unwell is shove them into hospital," Ms Morton said.
"And that's unnecessary."
She said Graylands was built to be and still was physically "a lunatic asylum".
"We can do much better than this."
Ms Morton said the state government would only pay a portion of the $600 million "worst case scenario" cost and expected a commonwealth contribution as well as private not-for-profit involvement.
She could not guarantee all funds raised from the land sales would go back into mental health.
Ms Morton told parliament on Tuesday that six alleged sexual assaults had been reported to Graylands' chief psychiatrist since July 1, which the opposition has attributed to the 14-bed female-only Dorrington ward being turned into a mixed unit.
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