So we should have kept empty hospitals open? Those hospitals were being emptied of patients well before Reagan took office. The Community Mental Health Act of 1963, which was a part of Kennedy's New Frontier social programs, is what started the exodus of mental patients. By 1975, the number of mental patients in federal or county mental institutions had fallen by 62% and by 1985 down by 80%.
Edit: The plan was to have mental patients cared for at the local level. In 1980 under Carter, The Mental Health Systems Act was passed that would have provided federal money to local mental institutions. It was repealed by the 96th Congress the very next year.