Objective To estimate the effect of a nursing home's share of residents with a serious mental illness (SMI) on the quality of care. Data Sources Secondary nursing home level data over the period 2000 through 2008 obtained from the Minimum Data Set, OSCAR, and Medicare claims. Study Design We employ an instrumental variables approach to address the potential endogeneity of the share of SMI residents in nursing homes in a model including nursing home and year fixed effects. Principal Findings An increase in the share of SMI nursing home residents positively affected the hospitalization rate among non‐SMI residents and negatively affected staffing skill mix and level. We did not observe a statistically significant effect on inspection‐based health deficiencies or the hospitalization rate for SMI residents. Conclusions Across the majority of indicators, a greater SMI share resulted in lower nursing home quality. Given the increased prevalence of nursing home residents with SMI, policy makers and providers will need to adjust practices in the context of this new patient population. Reforms may include more stringent preadmission screening, new regulations, reimbursement changes, and increased reporting and oversight.