St. Elizabeths Hospital was founded in August 1852 when the United States Congress appropriated $100,000 to construct a hospital in Washington, D.C., to provide care for indigent residents of the District of Columbia and members of the U.S. Army and Navy with brain illnesses.

In the 1830s, residents, including Dr. Thomas Miller, a medical doctor and president of the D.C. Board of Health, had begun petitioning Congress for a facility to care for people with brain diseases in the City of Washington. Dorothea Dix served as a pioneering advocate for people living with mental illnesses, and she helped convince legislators of the need for the hospital. In 1852 she wrote the legislation that established the hospital.Dix, who was on friendly terms with U.S. President Fillmore, was asked to assist the Interior Secretary in getting the hospital started. Her recommendation resulted in the appointment of Dr. Charles H. Nichols as the hospital's first superintendent. After his appointment in the fall of 1852, Nichols and Dix began formulating a plan for the hospital's design and operation. They set out to find an appropriate location based on guidelines created by Thomas Story Kirkbride.His 1854 manual recommended specifics such as size, ventilation, number of patients, and the need for a rural location proximate to a city. He also recommended that the location have good soil for farming and gardens for the patients. Large facilities were self-supporting, and some of the work was considered good for patients to engage in.

Dr. Nichols oversaw the design and building of St. Elizabeths, which began in 1853. The hospital was constructed in three phases. The west wing was built first, followed by the east wing, and finally, the center portion of the building, which housed the administrative operations as well as the superintendent's residential quarters. All three sections of the hospital were operated under one roof, in keeping with Kirkbride's design. Two other buildings, the West Lodge for men and the East Lodge for women were built to house and care for African-American patients, as the city was effectively racially segregated.

Soon after the hospital opened to patients in January 1855, it became known officially as the Government Hospital for the Insane. During the Civil War, the West Lodge, originally built for male African-American patients, was used as a general hospital by the U.S. Navy. The unfinished east wing of the main building was used by the U.S. Army as a general hospital for sick and wounded soldiers. The Army Hospital officially took the name of St. Elizabeth's Army Medical Hospital to differentiate it from the psychiatric hospital in the west wing of the same building. The name St. Elizabeth's was derived from the colonial-era name for the tract of land on which the hospital was built.

After the Civil War and the closing of the Army's hospital, the St. Elizabeth's name was used unofficially and intermittently until 1916. Congress passed legislation changing the name from the Government Hospital for the Insane to St. Elizabeths Hospital, inexplicably omitting the possessive apostrophe. It also transferred the hospital's administration to the United States Department of the Interior.

In the late 19th century, the hospital temporarily housed animals that were brought back from expeditions for the Smithsonian Institution. There were no other federal facilities for such purpose, as the National Zoo had not been built.

In the 1940s and 1950s, St. Elizabeths was using electro-shock in an effort to treat mental illness. In this period, it applied electro-shock and other treatments in an attempt to convert homosexual individuals to heterosexuals, in the mistaken belief that they were suffering from mental illness. St. Elizabeths is considered one of the more notorious institutions of repression of the LGBTQ community.

Several important therapeutic techniques were pioneered at St. Elizabeths, and it served as a model for later institutions. It was the first to use hydrotherapy, Freudian psychoanalytic techniques, dance therapy and psychodrama, for instance. Walter Freeman, a one-time laboratory director, was inspired by St. Elizabeths to pioneer the transorbital lobotomy. It was used to treat epilepsy and some psychiatric conditions.

During American involvement in World War II, the Office of Strategic Services (OSS, predecessor to the CIA) used facilities and staff at St. Elizabeth's Hospital to test "truth serums." OSS tested a mescaline and scopolamine cocktail as a truth drug on two volunteers at St. Elizabeths Hospital but found the combination unsuccessful. Separate tests of THC as a truth serum were equally unsuccessful.

In 1963 Dr. Luther D. Robinson, the first African-American superintendent of St. Elizabeths, founded the mental health program for the deaf. Throughout his career, he was a leading authority on treating deaf patients with brain disorders.

By 1940, St. Elizabeths Hospital was transferred to the Federal Security Agency (later the Department of Health, Education, and Welfare) as a U.S. Public Health Service Hospital.[13] At its peak, the St. Elizabeths campus housed 8,000 patients annually and employed 4,000 people.[14]

Beginning in the 1950s, however, large institutions such as St. Elizabeths were being criticized for hindering the treatment of patients and for outright abuse of some patients. The 1963 Community Mental Health Act led to deinstitutionalization. The act provided for local outpatient facilities and drug therapy as a more effective means of allowing patients to live near-normal lives. 

The first community-based center for mental health was established at St. Elizabeths in 1969. The patient population of St. Elizabeths steadily declined as alternatives were sought for treatment. Unfortunately, the act was never fully funded, states did not provide sufficient funds for community centers, and there has been a widespread failure to provide treatment for the mentally ill. They make up a large proportion of the homeless, an increasing problem in many cities, as well as a high proportion of people held in jails and prisons. Lacking stable lives, many get caught up in the justice system through drugs and crime. In 1967, the hospital was transferred to the National Institute of Mental Health.

The campus of St. Elizabeths is located on bluffs overlooking the confluence of the Potomac and Anacostia rivers in the southeast quadrant of Washington, D.C. It is divided by Martin Luther King Jr. Avenue between the 118-acre East Campus (now owned by the D.C. government) and the 182-acre West Campus (owned by the federal government). It has many important historic buildings, foremost among them the Center Building, designed according to the principles of the Kirkbride Plan by Thomas U. Walter. He is notable as the primary architect of the expansion of the U.S. Capitol that was begun in 1851.

Much of St. Elizabeth's campus had fallen into disuse by the early 21st century and was in serious disrepair. The number of patients had steadily declined since the mid-20th century as community alternatives were sought for large mental institutions. In 2002 the National Trust for Historic Preservation ranked the hospital complex as one of the nation's "11 Most Endangered Places". Access to many areas of the campus, including what was then the abandoned West Campus (which houses the Center Building), was restricted before 2010. A variety of proposals were made on how to use and/or redevelop the site. Now it is restricted because of the nature of the tenant agencies in the Department of Homeland Security.