Everyone is celebrating a high profile murder case Lassiter cracked that is going to be featured on the local news that night. Shawn is annoyed by Lassiter's endless boasting about his victorious take down of Bernie Bethel, a millionaire accused of murdering Sheila Hanson, a woman he was having an affair with at the time of her death. The news report airs, and everyone gathers around to watch. Bernie's brother Daniel is interviewed, saying he is completely shocked and devastated by everything that has happened with his brother. Just as Lassiter's big, on-camera interview is going to air, an update interrupting it flashes across the screen saying that Bernie was found not guilty by reason of insanity. Lassiter is devastated and sees this as a travesty of justice, as Bernie is going to live out the rest of his days in a cushy, country club-type atmosphere as opposed to prison where he belongs.
Shawn makes the claim that Bernie is lying about being insane and that if given the chance to go undercover within Bethel's Psychiatric Hospital, he can get Bernie to come clean about not being insane.
Shawn meets his only contact inside the mental hospital, Dr. Elliot. Gus is there too, buttering up Dr. Elliot, trying to get the hospital to hire his pharmaceutical company. Gus then learns that he is going undercover too... as an orderly. He is, at first, very apathetic about his assignment, until Vivienne shows up, a very attractive patient inside who suffers from multiple personality disorder. The SBPD tells Shawn that he is to contact them through a hidden camera in a plant once he can get Bethel to confess.
Shawn first spots Bernie talking to his brother Daniel. Later, at "group", we meet Nurse McElroy, the rigid head nurse who is looking daggers at Shawn. Shawn approaches Bernie, who he initially perceives to be an OK guy. However, Shawn still doesn't buy his supposed act and goes on to make the claim that Bernie's "fear of mirrors and saxophones" is just a fake symptom he created.
Later that night, Shawn and Gus follow Bernie to the kitchen. Bernie is alone, and doing strange things... things that lead Shawn and Gus to believe that Bernie may not be faking it at all... that he may actually be crazy, or else why would he feel the need to put on the crazy act while he is completely alone?
Shawn now believes that Bernie really is crazy, so he tries to get further proof of it by convincing Bernie to meet him in the room with the camera plant. While there, Shawn tells Bernie that he believes he is actually crazy. He flashes a hand mirror in Bernie's face to get him to go nuts, but Bernie doesn't freak out. He remains calm and even smiles, thus confusing Shawn even more. Why isn't Bernie freaking out? Is he not really insane after all?
At group exercise, Shawn confronts Bernie and tells him that he believes he is a fake. Bernie, now lucid, tells Shawn that he couldn't have strangled Sheila because he has an arthritic condition, and that during the trial, he wasn't lucid and the fact that he had arthritis never got brought up to his lawyer.
Shawn "envisions" the pill being administered to Bernie, and it reads 50 mgs — not 1000 mgs, the dose he saw Bernie initially take. With Gus's help, Shawn formulates a new theory: Bernie appeared insane initially because his medication hadn't kicked in yet. And now that it has kicked in, Bernie no longer appears to be insane.
From this, Shawn puts it together that Dr. Elliot was the inside man getting paid to make Bernie crazy by not giving him the proper dosage of meds. However, when Shawn goes to confront Dr. Elliot about this, he finds Elliot dead. Shawn runs to tell someone about Elliot's death, but he gets knocked out. Shawn later wakes up to find himself in restraints, surrounded by orderlies. Shawn tries to tell the orderlies the truth of what is going on — that he is there undercover — but they don't believe him.
Gus tells Juliet and Lassiter about Bernie's arthritis. They go to question Bernie's lawyer, Phillip Zurn. Zurn claims that Bernie said a lot of crazy things during the trial, and that if he knew about the arthritis, he would have brought it up to help clear his name. Zurn also says that Bernie was his only client for the last 20 years. Juliet finds this fishy, as Zurn's office appears to be experiencing success and expansion after losing their only client.
Gus finds a restrained Shawn and helps him escape. They see Bernie being wheeled to the 2nd floor to get electro-shock therapy, but Vivienne creates a diversion, thus enabling Shawn and Gus to make their escape from the hospital with Bernie in tow.
Just then, Juliet gets a call that Shawn just broke Bethel out of the mental hospital. Juliet tells Shawn on the phone that she thinks the lawyer Zurn may be the mastermind. Shawn puts it together that Zurn must have found out that Elliot put Bernie on meds that made him lucid and had Elliot killed so that Bernie wouldn't receive the right meds and would therefore remain as though he was actually insane and not simply a person who was off their meds.
Shawn also makes the claim that there is no way Zurn could have acted alone, and that there must have been someone on the inside making sure Bernie got the incorrect dosage of meds. Shawn figures out that the insider tampering with Bethel's meds, keeping him crazy, was Nurse McElroy.
They head to Nurse McElroy's apartment to confront her, and McElroy admits to messing with Bernie's dose, but doesn't cop to killing Elliot. Shawn believes her, then Shawn flashes back to the local news piece. He remembers one of the people interviewed was Bernie's brother Daniel. And sure enough, Daniel enters the room with a gun drawn, signaling that he was the one behind framing Bernie for Sheila's murder all along. In order to save himself, Gus, Bernie, and Nurse EcElroy from getting killed by Daniel, Shawn blares a Kenny G album, forcing an unmedicated Bernie into a panicked freak out similar to an outburst he had earlier. Bernie goes nuts from his real phobia of saxophones. Just then, Lassiter and Juliet show up, guns drawn, and are able to take down Daniel and save the guys.
In the end, Bernie gets the treatment he needs and the real murderer, Bernie's brother, is put behind bars.
Bernie Bethel shares the initials of Billy Bibbit and the talents of Brad Dourif, who played both characters, the latter in the seminal psychological drama One Flew Over the Cuckoo's Nest, directed by Miloš Forman, which swept the Oscars for 1975. "Girl, Interrupted", a 1999 Angelina Jolie star vehicle, furnishes the title.