There were very serious civil rights issues. Different types of status to be institutionalized (e.g. 5150 in California) result in a complete suspension of your constitutional rights. This is required to forcibly detain you, despite not being convicted of a crime.

The closure of the public hospitals followed the vilification of the lobotomy, which was in many regards superior to the chemical incarceration that replaced it... again, people were concerned about the civil rights issues.

The fact is, our mentally ill need to be cared for by their family and community with expert guidance. Unfortunately, our society has become too diverse and low trust for that to be a reality for any but the very wealthy.