Not much is known about Max Laughton at first, but it is clear that he is conducting a particularly important research and is close to reaching his goal. Eager to share the good news with his family, Max hurries home in his car. However, somebody has evidently tampered with the vehicle; failing to control it, Max gets in a serious accident and loses his conscience. When he wakes up, he finds himself in a strange tower resembling an asylum, surrounded by insane people, the shrill sound of alarm driving him mad. Max cannot remember anything from his past and is feverishly trying to escape this place. But just when he thinks he has succeeded, he is taken on delusional, horrifying trips through his subconsciousness, unable to distinguish between reality and hallucinations.

Sanitarium is a point-and-click adventure game, best described as a psychological thriller. The game is divided into nine chapters, each taking place in a different location and having its own distinct atmosphere. It is not always clear if something is happening on the grounds of the sanitarium or in the delusional mind of the protagonist. In most chapters the player controls Max himself, though in the more surreal areas drawn from his memories the role of the protagonist is given to other characters, real or fictional. 

Both movement of Max and picking up items are done with the mouse. Puzzles are mostly inventory-related, with a few machine and lever puzzles. There are also a few action sequences, but even when the player dies, the game can be continued without any penalty. Talking to various NPCs will teach the player about their bizarre surroundings. The plot unfolds as Max's memories are gradually restored and the player finds out more about his past and the nature of the research he was dedicating his life to.