Authorized by the legislature in 1887 to relieve overcrowding at Weston State Hospital, Spencer State Hospital was opened July 18, 1893. Its connected brick buildings, a quarter-mile in length, were sometimes referred to as the longest continuous brick building in America. Situated west of U.S. 33 on 184 acres donated to the state by Roane County, Spencer State Hospital remained in operation until June 1989. Spencer's original charter was to care for people with mental illnesses, although its mission broadened at times to include diseases such as typhoid fever, tuberculosis, and pneumonia.

The hospital's farms were used for a dairy herd, hogs, chickens, vegetable gardens, and woodlands, providing food for patients and staff. The hospital also had its own water and power supplies. An additional 295 acres west of the facility were used for patient recreation and the hospital dam's watershed. The institution maintained an open-door policy within the hospital grounds, with patients free to come and go, but a fence was erected around the hospital to separate patients from the town. Between 1973 and 1976, the administrative building was torn down and replaced. In October 1993, the city of Spencer held an auction to dispose of most of the equipment left behind when the hospital closed. A local employer, Monarch Rubber Company (later Armacell), agreed to take possession of the Spencer State Hospital whistle so that residents could continue hearing its regular blasts morning, noon, and night.