I've never heard any of this about a psychiatric ward before and he was definitely not arrested in Russia on a visit.He was also an OSS asset - and there is a more than decent chance that the Russians knew it. I do not see any way this very special case with this very special man can be used to make a statement about broader issues to do with mental health. I walk by a memorial to him near Deák ter on a regular basis and think of him often.
Officially he was arrested by the Russians for espionage in Budapest in 1945, during the war, with later reports suggesting he was actually involved in an espionage effort. He allegedly died in prison a few years later. There were claims that he was sighted in prisons and psychiatric hospitals as late as the '80s but if they're true then this certainly wasn't used as a cover, he was already claimed dead. The psychiatric ward angle doesn't really make sense in these circumstances, there's no need for a cover story when the official story already sounds like a cover, and even presumably legitimate.
The incentives may change by country, but it is pretty common to setup wards like prisons, for practical reasons. And that can be abused, as every form of power will eventually be.