In 1954 widower U.S. Marshal Edward "Teddy" Daniels and his new partner Chuck Aule go to Shutter Island, home of Ashecliffe Hospital for the Criminally Insane, to investigate the disappearance of a patient, multiple murderess Rachel Solando, who has escaped her cell and apparently the desolate barren island, despite having been kept in a locked cell under constant supervision.
Visiting Rachel's room, Teddy and Chuck discover a puzzle that Teddy believes points to a 67th patient. Teddy also reveals to Chuck that he is there to avenge the death of his wife Dolores, who was murdered two years prior by one of the inmates, Andrew Laeddis. The novel is interspersed with graphic descriptions of WW II and Dachau which Teddy helped to liberate. As a hurricane hits the island, Teddy and Chuck investigate Ward C where Teddy believes government experiments with psychotropic drugs à la concentration camps and gulags are being conducted. One inmate tells Teddy that Chuck is not to be trusted.
As Teddy and Chuck return to the main hospital area, they are separated. Teddy discovers an ex-psychiatrist hiding in sea caves, who reinforces that he has no friends on the island and is himself a prisoner. Upon returning to the hospital Teddy cannot find Chuck and is told he had no partner. He escapes and makes his way to the lighthouse to rescue Chuck. After cornering the head doctor, Dr. Cawley, Teddy is told that he is Andrew Laeddis (an anagram of his name) and that he murdered his wife two years ago after she murdered their three children. Teddy/Andrew has been living an elaborate fantasy that Dr. Cawley and "Chuck" (actually his psychiatrist, Dr. Sheehan) have devised in order to force their patient to confront the truth, or else undergo a radical lobotomy treatment. Teddy/Andrew then realizes that he killed his wife. This breakthrough means that he is on his way to recovering his sanity.
The next morning Teddy/Andrew wakes up, leaves the dorm and sits outside on the hospital steps. Chuck/Dr. Sheehan sits next to him. Andrew asks Dr. Sheehan if it is better to live as a monster or die as a good man. Andrew's comments seem to indicate he has regressed back into his insane Teddy persona. Dr. Sheehan signals Dr. Cawley and the Warden. The Warden and hospital staff walk toward Teddy/Andrew with a straitjacket, and a metal object believed to be an ice-pick. "Chuck" tells "Teddy" "not to worry, we're too smart for them". Teddy/Andrew then answers "Yeah, we are, aren't we?. As Andrew calmly walks away with the orderlies to prepare for a lobotomy, Dr. Sheehan calls out to him as "Teddy", but receives no response.