Mental institution for first offense?

It was part of the plea deal. In the novel, he is in the institution for four years!

Being in hospital is not a form of prison or punishment.

Depending on the details of your condition you might benefit most from weekly therapy, a day clinic, or a full stationary visit. And hoepfully you'll get the best treatment for you. That really doesn't depend on whether there is a first (or any) offense on the table... at least not in my country. He might have been diagnosed in any other situation and still gone to hospital for treatment.

I think part of the implication was that the jury was sorry for him (his wife had just stabbed him in the back) and didn't want to send him to prison for assault. So they accepted the insanity plea. Since he had been violent, he had to be under close observation for a while. I don't know exactly insanity pleas are treated, medically speaking.