Health inspectors have raised concerns over the "high" number of mental health patients who are being sent to care facilities far away from their homes.
The Care Quality Commission (CQC) said this could isolate patients from their support network and cut them off from local services that provide care once they have been sent home.
The watchdog analysed data on 3,721 patients in England on 311 wards, provided at 203 locations.
It found that nearly two-thirds (63%) of placements in residential-based mental health rehabilitation services are "out of area" - or outside the local health area where the patient usually lives.
New analysis by the CQC estimates that £535 million is spent on residential mental health rehabilitation annually, with "out of area" placements accounting for around two-thirds of this expenditure.
NHS patients sent for care in independent care organisations are more likely to be out of area.
Those sent to independent providers for residential mental health rehabilitation services are also more likely to have travelled further for care and are more likely to have a longer stay, CQC found.
CQC found that the average daily cost to care for a patient in a residential mental health rehabilitation is similar across the NHS and independent sector.
But because patients are staying for longer stints in the private sector, independent services can end up costing twice as much as NHS services.
Dr Paul Lelliott (pictured), deputy chief inspector of hospitals and lead for mental health at the CQC, said: "We are concerned about the high number of beds in mental health rehabilitation wards that are situated a long way from the patient's home.
"This dislocation can mean that people can become isolated from their friends, from their families and from the services that will provide care once they have been discharged.
"Also, we are concerned that our evidence shows that on average, people in 'out of area' placements can end up staying in residential rehabilitation for twice as long as they would have done in a local NHS bed, which can increase their sense of institutionalisation, affect their onward recovery, and can be very costly.
"The attention now must be on developing services that are focused on people's recovery and that are not 'long-stay' wards in disguise, that are closer to where people live, and that are well-connected to the wider local system including services that will provide aftercare."
Dr Rajesh Mohan, chairman of the Royal College of Psychiatrists' rehabilitation faculty, said the figure was "deeply worrying", adding: "As with any mental illness, rehabilitation patients should only be treated out of area if they need access to specialist services.
"The reason more and more patients are being sent inappropriately out of area is because NHS rehabilitation services have been closing at an alarming rate - in 2009 there were more than 130 such services in England; by 2015 that number had fallen by a third to just 82.
"That's why we're calling on the Government to reverse this trend and ensure every part of the country has comprehensive inpatient and community rehabilitation services. That way, as many patients as possible would be treated locally."
Ministers have previously pledged to eliminate "inappropriate out-of-area placements" for mental health patients by 2020/21.
An NHS spokesman said: "We have started to eliminate out-of-area placements for non-specialist in-patient admissions, so patients get timely, appropriate acute mental health treatment as close to home as possible.
"However, as CQC acknowledges today, the NHS is in the middle of delivering a five-year plan to transform mental health services.
This will clearly need to ensure people in need of rehabilitation get this care as close to home as possible whilst recognising that it is unlikely that all clinical commissioning groups will have access to such specialist services within their own geographies."
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