We know that the flashbacks sometimes go WAY back. And sometimes they are closer to the crash. Hurley won the lottery after he got out of Santa Rosa. We can assume Libby, who maybe was a Shrink once, must have had to deal with a particularly bad case, and ended up in the institute. Or, Perhaps she only got her Shrink job after she was "cured" at Santa Rosa. Either way, the next flashback she's in, she is perfectly sane. ((I won't spill anything here, but you can check out Spoilerfix))