I'd go for an approach that had no prison at all for minor offenses, maybe just community service. For moderate offences, something like the Scandinavian ones with a large focus on rehabilitation. For life imprisonment, a remote island like in the movie No Escape. However, in the movie only half of the island convicts formed a community and started farming while the other half went all Lord of the Flies. I can't remember why they also had a futuristic rocket launcher on the island. That's the 90's for ya.
It certainly not as easy as it is in my head. No idea how I would factor in the large number of inmates with mental illness.