On 31 January 1894 an agreement was entered into between Kesteven County Council and the Borough of Grantham to apply to the Secretary of State to be united for the purposes of the Lunacy Act, 1890, and to set up their own asylum. A Visiting Committee was established in May 1894. Ownership of the existing asylum at Bracebridge Heath was settled by arbitration in 1896. The old workhouse at Grantham was leased from the Great Northern Railway Company for conversion as a temporary Kesteven and Grantham District Asylum, and a site at Quarrington was purchased on which to build permanent premises. Grantham withdrew from the union in December 1896. The temporary Kesteven County Asylum was opened in January 1897, and the permanent premises were opened in June 1902. From 1924 the institution was known as the Kesteven Mental Hospital. In April 1933 the Visiting Committee united with the Visiting Committees of the Borough of Grantham and the Soke of Peterborough County Council to form a Joint Visiting Committee to administer the hospital, renamed the Rauceby Mental Hospital. Peterborough withdrew from the joint arrangement at the end of March 1937.
The hospital was occupied by the RAF in June 1940 as a military hospital and the patients were transferred to the Bracebridge Heath Hospital, the Leicester City Mental Hospital, the Aston Hall Mental Deficiency Institution, the Nottingham City Mental Hospital, the Derby Borough Mental Hospital, the Derby County Mental Hospital, and the Leavesden Hospital, Hertfordshire. The RAF withdrew in July 1947 and the premises were renovated, but it was 1956 before all the transferred patients had returned.
In 1948 the hospital passed to the National Health Service and was initially administered by the No. 3 Hospital Management Committee of the Sheffield Regional Hospital Board. The name of the hospital was later changed to Rauceby Hospital. It was closed as a mental hospital c1997.