Mental health patients face inadequate community services, extremely long waiting times and some may never get specialist care, a report has claimed.
Too much has been spent on long hospital stays, the report say
This is because too much money has been spent on long term hospital stays and compulsory treatment, the think tank Reform says in its report.
It is calling for choice and competition to cut waiting times dramatically for the "vast majority".
NHS managers said shortages of expert staff was a big barrier to this.
Similar concerns were raised by the Healthcare Commission in September. Its review of 174 mental health teams in England found gaps in out-of-hours care, talking therapies and access to information.
The latest report, by Nick Bosanquet, Professor of Health Policy at Imperial College London and others, says choice and competition will allow an efficient redeployment of resources and enable patients to regain independence.
Reform also said that the prescribing of modern drugs was insufficient.
Between 1999-00 and 2003-04, spending on inpatient, outpatient and day patient services rose by £1.1bn.
This compared to an increase of only £400m for community mental health and illness nursing, says the report.
Researchers believe that the modern model of mental health care, which involves early intervention, community support, reduced admission and help finding jobs, can be delivered through choice.
Reform claims the postponement of the introduction of payment by results for mental health services has been a major setback.
It recommends making much more use of direct payments for patients who are reaching the point of discharge, and rehabilitation and for those needing therapy in the community.
Prof Bosanquet said: "Mental health services have been left out of the mainstream of NHS policy for too long. Modern thinking has not been applied to a key illness of modern society.
"The application of the health reform principles will bring benefits to some of the most vulnerable of NHS patients. Unless mental health services use the reform incentives funding pressures will see community services further undermined."
Nigel Edwards, director of policy at the NHS Confederation, said: "We would welcome more choice in mental health.
"However, one of the biggest barriers to creating choice in this sector is the shortage of specialist staff."
He said developing a system of payment by results for mental health was a big challenge.
Shadow health minister, Tim Loughton, said: "We have long been calling for more choice within mental health services.
"In too many cases access to timely and sustainable treatment remains a lottery and these services are now bearing the brunt of NHS deficits."