First it's a mental institution, and without warning it becomes a brothel with the same characters in it. This is played straight, and the fantasy world is a metaphor for whatever's going on in her head as they do different things and she dances. As they escape the brothel it becomes evident that it's actually still the nuthouse, meaning the fantasy world is a metaphor nested inside a metaphor (if she's not actually dancing, then where does the fantasy world come from?). The movie then snaps back to the moment of her lobotomy, where it first departed, and some of the connections in the brothel/nuthouse metaphor are revealed (the lobotomy doctor was the High Roller who was coming in five days).

Then it breaks down a little when I think about it, because beyond the High Roller thing there doesn't seem to be any reason why the nuthouse became a brothel for the duration of the story, unless perhaps it's simply that Babydoll is literally insane. There are implications that she wanted the doctor to lobotomize her, which doesn't make sense to me either. Sacrificing yourself so someone else can escape is a little different than wanting to be lobotomized.

There's also the question of the other girls. If the brothel was really the mental institution all along, then what happened to Amber and Blondie? Did the orderly kill them as Blue did in the brothel metaphor? How did he get away with that? How would it have worked when in the metaphor all the other girls were there when it happened? What governs which things in the brothel correlate with things that happened in the nuthouse? Clearly the stealing of the knife, the setting of the fire, and the stabbing of Blue all had real-world nuthouse parallels, but why those things and not other things? In the brothel Blue bullied Madam Whatsherface, but in the nuthouse as far as we can tell nothing of the sort happened -- she was a bigger fish than him. Why some parallels but not others? No explanation is offered.

We also have no idea what Sweetpea and the others were in the mental institution for, and as far as we know Babydoll may have been helping a serial killer escape. Were they all mental innocents put in there by hateful stepfathers? We have no idea. We know nothing of them outside of the brothel metaphor. (Also, Rocket gave Babydoll a tour in the brothel, but the idea of having one mental patient give another a tour of the facility is ludicrous, making it another example of there being no parallel for no discernible reason.)

What exactly was going on with the orderly and Babydoll at the end? Was he going to kill her? Rape her? It's unclear, except for the fact that he's obviously crazy too. The police then show up for no real reason. It seemed that Madam Whatsherface called them, but why did she let Babydoll back into the orderly's hands in the first place if she knew something was up?

The connection between reality and the metaphor within a metaphor (the fantasy land) comes in with the angel character at the end, but even that's a bunch of mystical hooey that has no actual connection to the story and no plot-related reason for being there other than the writers finding it cool.

That's my basic complaint about the entire mind-bending aspect of the film. Things are done mostly because they seem cool, not for any cogent, consistent thematic basis.

But it's still hella stylish and fun to watch.