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Following a precipitous rise in incarceration rates over the last four decades, U.S. policymakers face increasing pressure to reduce the financial and social costs associated with the criminal justice system. Few proposed reforms have garnered more widespread support than pretrial diversion, which provides for assignment of some individuals to mental health treatment as an alternative to prosecution. Diversion programs are widely hailed as a key solution to the incarceration crisis, but research examining their impacts is limited. Drawing on a year of ethnographic fieldwork in a large urban jurisdiction and analysis of court data, this study has three primary findings. First, although diversion programs allow participants who complete treatment to avoid felony convictions, they can increase punishment for those who do not complete. Second, rates of completion are low and highly unequal across demographic groups. Third, inequalities in completion rates are configured by differences in mental health. As a result, the defendants most in need of mental healthcare are paradoxically those most likely to suffer negative consequences when diverted into treatment. These findings suggest that some therapeutic alternatives may serve less to re-socialize than to sort, setting apart for punishment the racialized and the ill. They raise questions about the risks inherent to reform efforts that repurpose the penal system to deliver mental healthcare rather than simply scaling back the system’s reach.