I believe Jerry was in a sanitarium because it was the only place that was suited to care for someone in his (fargone) state; at that point, there was nothing a hospital could do for him. I don't think Baldy View was a sanitarium in the sense we think of today: along the lines of a mental hospital. According to dictionary.com, a sanitarium really is:
san·i·tar·i·um
–noun, plural -tar·i·ums
an institution for the preservation or recovery of health, esp. for convalescence; health resort.
I'm sure it was more like a convalescent home; there's no way Moe would've put Jerry in a mental hospital.