The author argues, on the basis of Steiner's theory of ‘psychic retreats’, that inpatient treatment is always at risk of turning into an unhelpful refuge. Thoughts on this problem and on the use of external reality in inpatient treatment are traced in the literature. He suggests that the combination of working on aspects of internal reality in psychotherapy and working on the corresponding aspects of external reality in psychosocial nursing can have a powerful therapeutic effect and can help to avoid treatment turning into a refuge. The setting of the Cassel Hospital is described and, using various case material, the author shows how a patient's internal dynamic can present itself in these two different arenas and can be worked on simultaneously in quite different ways. Crucial in this concept is the co-operation of staff with the aim of understanding the dynamics between staff and patients and between members of staff. The paper concludes by looking at the mutual influences within the institutional dynamics of the hospital.