IIRC, the Zhodani try to treat the illness of any insane crime (those comited willingly), and if they are not healable, they are just eliminated, as they see imprinonment as too cruel (and probably the sedes or more insaity), and releasing them would be too dangrous for society.
Many of them have uses outside the consulate, so they will get used for that.
Keep in mind also: they are masters of the mind. There are few items they can't cure or at least control.
For example, many sociopaths and a good portion of psychopaths function just fine in regimented lifestyles when given a purpose to fulfil... it's when they get out of that regimented life that they lose it. And the Zhodani can check for that issue... and know which ones to keep on duty for everyone else's good. Or at least the good of the citizens of the Consulate.