Reducing rural-urban disparities in health and health care has been a key policy goal for the Chinese government. With mental health becoming an increasingly significant public health issue in China, empirical evidence of disparities in the use of mental health services can guide steps to reduce them. We conducted this study to inform China's on-going health-care reform through examining how health insurance might reduce rural-urban disparities in the utilization of mental health inpatient services in China. This retrospective study used 10 years (2005-2014) of hospital electronic health records from the Shandong Center for Mental Health and the DaiZhuang Psychiatric Hospital, two major psychiatric hospitals in Shandong Province. Health insurance was measured using types of health insurance and the actual reimbursement ratio (RR). Utilization of mental health inpatient services was measured by hospitalization cost, length of stay (LOS), and frequency of hospitalization. We examined rural-urban disparities in the use of mental health services, as well as the role of health insurance in reducing such disparities. Hospitalization costs, LOS, and frequency of hospitalization were all found to be lower among rural than among urban inpatients. Having health insurance and benefiting from a relatively high RR were found to be significantly associated with a greater utilization of inpatient services, among both urban and rural residents. In addition, an increase in the RR was found to be significantly associated with an increase in the use of mental health services among rural patients. Consistent with the existing literature, our study suggests that increasing insurance schemes' reimbursement levels could lead to substantial increases in the use of mental health inpatient services among rural patients, and a reduction in rural-urban disparities in service utilization. In order to promote mental health care and reduce rural-urban disparities in its utilization in China, improving rural health insurance coverage (e.g., reducing the coinsurance rate) would be a powerful policy instrument.