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Historically, some normal children were raised by institutions (i.e. Duplessis Orphans [1]); in all cases the results were statistically worse than being raised by a dysfunctional family, and certainly were a tragedy. This is proof institutional damage exists apart from disease or apart from the reason of the instutionalization. Even an ideal institution will cause some of it in the absence of a family.
-Lack of any basic skills such as making any kind of food or knowing about traffic lights, as present in Duplessis Orphans or any other normal/near normal person raised by an institution other than a school.
-Abusive punishment for normal behavior, leading to heavy psychological damage.
-Lack of knowledge of the culture of normal people except for maybe television. This makes it harder to have frequent discussions with people outside the institution, therefore making it harder to have many friends.
-Lack of variety in life experiences, leading to immaturity and being easily fooled by fraud specialists or advertizing.
-Not being used to have responsabilities at all may be an acute problem.
-Lack of intellectual stimulation leading to lower IQ, lack of work training or knowledge.
-People leaving an institution they have been with for years may be completely without peer support to start with.
-Poor eating habits due to institutional ideology or low budget. Vitamin deficiencies may be present. Hospital food in public hospitals is usually unpleasant to most people not to mention only marginally nurishing.
-Depending on the institution, the staff may practice what would be considered barbaric and cruel may be commonplace and poorly supervised (or not supervised for the right goals, as the torture checkbox on some internal military prison documents indicate).
-Almost all the bad treatment between people in institutions is tolerated; school bullies being the mildest example
-Bad habits such as smoking or drugs are hard to quit when most people smoke in close proximity on a regular basis. Many people start smoking in school because of it.
-Punishment may be related to the selfish needs of the institution or staff rather than anything else. As such investigations are rare and usually the results are ignored if the staff doesn't like them. School directors are especially overworked and will rarely investigate who started a battle when it occurs. When in doubt they punish so there is an apparence of justice to parents unrelated to the incident.
-Lack of budget-balancing skills, and not knowing tax return exist. Finding out about tax returns years after going out of the institution can be a huge problem.
-Not being able to recognize a policeman because you never saw their type of uniform before. Policeman realising this may take it as proof of insanity.
-Some institutional treatments or teachings are of dubious quality, or not good enough to compensate for institutional damage.
-Bad health and poor self-esteem often result.
-Orphan schools are usually poor and give a poor quality of education. Aside from the education in the books, most life skills you'd get from living in a family (even a dysfunctional one) are absent.
-Prisons may have laws that explicitely prevent any kind of re-adaptation or training beyond learning to read and religious conversions.
-Hospitals generally think anything is less worthwhile use of their budget than saving lives. You can't earn a meaningful education while being in a hospital.
-In some mental hospitals, medication may be used to keep someone calm (sometimes too calm). Calm is the goal, and improvement may be measured rather than caused by the counseling. Medication may be used where good counseling would work, because mental hospitals are typically badly underfunded.
-In autism-related and "midway houses" used to sort incoming youth to specialized institutions, most staff are low paid and poorly trained with little or no specialists around on an average week. In many such institutions the supervision is low and nothing short of being caught stealing, raping, or worse can really make you lose the job.
-The few idealistic staff are equally poorly trained and tend to help out a few individuals while ignoring the rest
-In institutions people are paid only to follow the rules. There is no rule saying that learning is important except outside of the school institution, so knowledge stagnation is guaranteed elsewhere. There is no rule pleasure must be present at least once a month, so life in an institution can be years of alternating boredom and stress - leading to depression. There is no rule people must learn to do things by themselves when they can, so very basic skills are regressing.
-The people doing inspections are paid by a institution itself of a board of similar institutions, so the inspectors and inspection results rarely blame the institution much less assign fault to important people who obviously did something very wrong. Inspection dates are known well in advance, and often proceed by questionnaire. This is a problem as some institutions get a very good review even if people die by lack of proper food intake [2] or rampant misuse of restraints [3]; this isn't on the checklist. School pedophiles and prison rape are ignored decades at a time because the institutions don't want a scandal.
-The worst institutions in the world have no other priorities than not getting caught neglecting you to death while maximizing profit/power and minimizing expenses/accountability. A few insane asylums and prisons fall into this category. These are an extreme case of course.
-Lack of accountability. If a prison guard rapes you, a teacher refuses to help you but helps others based on race or handicap, or a hospital charges exhorbitant fees to tourists for opening a file, or the budget is mis-spent on something absurd, there is no punishment to either the perpetrator or the institution. Institutions tend to accumulate such loopholes over time until leaders can do as they please. The internal inspections fix nothing.
-Prisons often don't really care if unpopular people get beaten up by a crowd of guards or inmates. They may have ordered it to reach interrogation, profit-protecting, or scandal-avoiding goals. Some schools may occasionally use student expulsion for the same goals (especially in relation to protection against pedophile scandals).
-Some institutions or governments may have needs of "sinners, criminal, terrorists" in order to "look tought on crime, terrorism, drug addicts, homosexuality" or whatever they want to look tough against. Such governments and institutions make a great effort to ignore rampant abuse (usually for electoral or social repression goals) and make no useful re-education or prevention so that a large number of "sinners/criminals/terrorists" continue to exist to justify the "need" for continual oppression and reelection of oppressors. If not enough "criminals" are available, more people innocent of the "crimes" will be oppressed and proof may be manufactured or not necessary to imprisonment.