This reform, which shifts responsibility for inpatient and ambulatory mental healthcare services to the health funds (HMOs), involves a significant change in mental health services in Israel. This paper examines the possibilities and the pitfalls that are connected with the implementation of the reform. It analyzes the issues facing those instituting the reform and the State, issues which remained unanswered or undecided at the time of the decision to implement the reform and will now have to be addressed. For example, it must be determined whether the targets set for the optimal number of patients in treatment is satisfactory, that the distribution of services is equitable, and that adequate community-based alternatives to inpatient treatment are developed and will be able to prevent unnecessary hospitalizations. In summary, the paper lays out recommendations for responding to these issues, as well as others that might arise in the implementation of the reform, including: administrative and financial resource allocation for independent research and evaluation, as well as for advancing the reform; the establishment of a special administrative body in the Ministry of Health that will be responsible for the implementation; and the strengthening of regulatory bodies that will be put in place for supervision and oversight of the reform process