The Medicare and Medicaid reimbursements account for more than half of its revenues.
The hospital has provided the largest share of acute psychiatric care capacity to fill the gap created by the forced closure of the 54-bed Vermont State Hospital in Waterbury after flooding from Tropical Storm Irene in 2011 inundated the state office complex.
The Retreat had been working on corrections, but inspectors investigated a new complaint in July about a patient that revealed more problems. A patient had behaved aggressively for several days, frightening other patients and repeatedly striking a mental health worker.
Document said when the patient resisted emergency medication, Brattleboro police were called in to help and the patient ended up being stunned with a Taser.
The Centers for Medicaid and Medicare Services said the Retreat violated the patient's rights by handing over authority to police when the patient was under the hospital's protection.
Senior Vice President Peter Albert said the hospital has adjusted its policies and created proper training and supervision of staff.