The long-term inpatient psychiatric hospital treating severely disabled patients is a complex, multifaceted institution in which many diverse people occupying different roles interact in order to accomplish the task of creating a holding environment for the patient. In this paper, we suggest that the primary function of a psychiatric holding environment is the delivery to the patient of the normative services which the nuclear family customarily provides. In order to provide this, the hospital, like the optimal family, holds both by restraining and by facilitating. Through an understanding of the strategic mental mechanisms which severely disturbed patients often employ in order to interact with and comprehend others, particularly empathy and projective identification, we may delineate more refined treatment strategies. Principles concerning the dynamics of small and large groups, patient-staff interactions, the treatment of so-called "hopeless" and negative therapeutic reaction patients, and supervision follow from these conceptualizations. In all of our explication, our perspective is guided by a systems framework but finds concrete expression in an object relational viewpoint.