Sanitarium tells the story of a man who suffers from amnesia after getting in a car accident and awakening in an asylum. As the story progresses, he frantically tries to unveil the details of his institutionalization and the search for his own identity.
The game uses a bird's-eye view perspective and a non-tiled 2D navigational system. Each world and setting carries a distinct atmosphere that presents either the real world, the imaginary world, or a mix of both of the main protagonist. In many cases, it is unclear to the player if the world the character is currently in is real or a product of Max's own imagination. This indistinction underlines much of the horror portrayed in the game.
The game is separated into different levels or "chapters" with each having a different style and atmosphere. The player must find clues, solve puzzles and interact with other characters to reach a final challenge where the player must reach the end of a path while avoiding obstacles. If the player fails to do so (by, for instance, getting killed) then the player is transported back to the beginning of the path without losing progress, thus a Game Over in this game is non-existent. When the player reaches the end of the path, a cinematic is played and the game proceeds to the next chapter.