Objective To examine the disparities in psychiatric service utilisation over a 10-year period for patients with first admission for psychosis in relation to urban–rural residence following the implementation of universal health coverage in Taiwan.

Design Population-based retrospective cohort study.

Setting Taiwan's National Health Insurance Research Database, which has a population coverage rate of over 99% and contains all medical claim records of a nationwide cohort of patients with at least one psychiatric admission between 1996 and 2007.

Participants 69 690 patients aged 15–59 years with first admission between 1998 and 2007 for any psychotic disorder.

Main exposure measure Patients’ urban–rural residence at first admissions.

Main outcome measures Absolute and relative inequality indexes of the following quality indicators after discharge from the first admission: all-cause psychiatric readmission at 2 and 4 years, dropout of psychiatric outpatient service at 30 days, and emergency department (ED) treat-and-release encounter at 30 days.

Results Between 1998 and 2007, the 4-year readmission rate decreased from 65% to 58%, the 30-day dropout rate decreased from 18% to 15%, and the 30-day ED encounter rate increased from 8% to 10%. Risk of readmission has significantly decreased in rural and urban patients, but at a slower speed for the rural patients (p=0.026). The adjusted HR of readmission in rural versus urban patients has increased from 1.00 (95% CI 0.96 to 1.04) in 1998–2000 to 1.08 (95% CI 1.03 to 1.12) in 2005–2007, indicating a mild widening of the urban–rural gap. Urban–rural differences in 30-day dropout and ED encounter rates have been stationary over time.

Conclusions The universal health coverage in Taiwan did not narrow urban–rural inequity of psychiatric service utilisation in patients with psychosis. Therefore, other policy interventions on resource allocation, service delivery and quality of care are needed to improve the outcome of rural-dwelling patients with psychosis.