To be truly effective, funding to treat mentally ill inmates would need to increase dramatically.  The mental health system has failed us all; it’s not only inmates that have chronic shortages of effective treatement.  This means segregation is sometimes the only viable alternative, since the potential harm to the segregated inmate can be the  lesser of two evils when considering  the potential harm to those s/he might attack.

Dry Liberal has an excellent point in that segregation cells could still offer some human interaction while preventing physical contact.  It would be even better if segregated prisoners had the option of closing off their cages when they so chose, in case another inmate was particularly bothersome.