The Justice Department reached a settlement Tuesday with the state of Georgia in a long-running case targeting what critics call the unlawful segregation of people with mental illness and developmental disabilities in state-run psychiatric hospitals.

In a compromise that officials said could affect other states, Georgia agreed to stop admitting people with developmental disabilities to state hospitals by July 2011 and transfer all those already in the hospitals to community settings by July 2015. The state also agreed to offer a range of services to 9,000 people with serious mental illnesses so they can be served in community settings instead of hospitals.

"The landmark settlement with the state of Georgia will allow thousands of people with disabilities (who) receive services to live in their communities rather than in institutions," said U.S. Assistant Attorney General Thomas Perez.

In return, Georgia Gov. Sonny Perdue said the state avoided a direct federal takeover of its mental health and developmental disabilities services and was able to preserve "Georgia's ability to make decisions on how best to serve Georgians."

"I have always said the state needed to provide better services to our most vulnerable citizens, and the Department of Justice has played a helpful role in spurring change in Georgia," he said.

Georgia became a focal point for the rights of people with disabilities in a 1999 U.S. Supreme Court case involving two institutionalized women seeking community-based care who sued Tommy Olmstead, then the commissioner of the Georgia Department of Human Resources.

In what became known as the Olmstead Decision, the Supreme Court ruled that the Americans With Disabilities Act requires states to care for elderly and disabled people "in the most integrated setting appropriate" — meaning people should be able to live in the community instead of institutions when possible.

States across the nation embraced "Olmstead planning" to encourage the release of people who were unnecessarily institutionalized. Some in Georgia grew frustrated with the state's pace. Federal investigators launched a probe in 2007 that found preventable deaths, suicides and assaults occurred with alarming frequency in state hospitals.

The state reached an agreement with the Justice Department in January 2009 to improve conditions at psychiatric hospitals by bolstering medical and nursing care. Investigators said they filed a new complaint after finding that Georgia violated the Olmstead case by failing to give patients more options to be served in community settings.

Under the agreement, Georgia must establish several 24-hour crisis service centers and mobile teams to respond to needy individuals experiencing a crisis anywhere in the state. It must also launch a toll-free statewide telephone system to offer details about how to handle a mental health crisis.

Georgia also agreed to create more than three dozen community teams to help the state's mentally ill residents transition into community settings, and pay for 35 community-based psychiatric hospital beds in hospitals that aren't run by the state.

Perez said the settlement not only fulfills Georgia's moral and legal obligations, but also helps the state financially. Georgia pays an average of $174,000 a year to house someone in a state hospital, compared with the $47,000 average cost to provide in-home services to the developmentally disabled, he said.

Several similar Olmstead cases are pending across the country, and Perez said other states will soon be hearing about Georgia's settlement in hopes that they follow the example.

"This agreement will indeed be our template for our work in other states," he said. "It addresses the needs of our people who are currently institutionalized who don't need to be there, and those who are in danger of being institutionalized."

The settlement differentiates between the developmentally disabled — those who have a lifelong physical or mental impairment that impedes their ability to function — and people who have mental illnesses such as schizophrenia or bipolar disorder.

The Atlanta-based Carter Center, which has long worked to improve Georgia's public mental health system, called it a "groundbreaking" agreement that allows those with mental illnesses more options for treatment.

"We look forward to working with all parties on the implementation challenges that lay ahead," the center said in a statement, calling this "a momentous time" to move Georgia forward as a model for meeting the needs of adults who have mental illnesses and developmental disabilities.