Paul Toombes (Vincent Price) is a successful horror actor whose trademark role was Dr. Death, a skull-faced sadist. During a party in Hollywood showing off his fifth Dr. Death film, he announces his engagement to Ellen Mason (Julie Crosthwait), who gives him an engraved watch as an engagement gift; later that evening, however, adult film producer Oliver Quayle (Robert Quarry) reveals Ellen had worked for him previously. Distraught at Toombes' reaction, Ellen returns to her room, where a masked man in dark garb, similar to Dr. Death's attire, approaches her with a knife. An apologetic Toombes comes in shortly after, only for her severed head to fall from her shoulders. Though he is acquitted of the crime, Toombes' career is destroyed as he spends several years in a mental hospital, where even he is not sure whether he killed Ellen or not.
After his release, Toombes is called to London by his friend Herbert Flay (Peter Cushing), the writer of the Dr. Death films, who has joined with Quayle to produce a Dr. Death television series for the BBC. While on the cruise ship en route to England, he encounters a persistent young actress (Linda Hayden), who takes his watch from his cabin and follows him through London, and eventually to Flay's house. In the spider-infested basement, Toombes discovers Faye Carstairs (Adrienne Corri), the female lead in one of the Dr. Death movies and now Flay's reluctant wife, driven mad after being disfigured in a car accident. Outside Flay's house, the young actress discovers the masked man walking the grounds; believing it to be Toombes, she approaches him, only to be killed with a pitchfork. When her body is discovered, Scotland Yard suspects Toombes, as the killing resembles a scene from one of his films.
Toombes experiences difficulties while working on set, publicly berating his female co-star; later that evening, she is found hanged by her own hair, another scene from a Dr. Death film. Scotland Yard questions him, but finds no conclusive evidence. While returning to Flay's house on several occasions, Toombes is harassed by the parents of the young actress, who recovered his watch and threaten to deliver it to the police unless he pays them a ransom. But the masked man strikes again by luring them into the house and impaling them both with a broadsword. On the set, the director is crushed by a descending bed canopy, suspected to be the intended fate for Toombes himself; Toombes is chased through the BBC studio later that evening by the masked man while on his way to an interview. Julia Wilson (Natasha Pyne), Quayle's public relations chief, discovers a contract in Quayle's files, but is killed by the masked man; Toombes discovers her lifeless body and suffers a nervous breakdown, reliving Ellen's death and his own doubt as to his role in it. Taking Julia's body onto the set, he locks himself inside and sets it ablaze.
Believing Toombes to have died in the fire, Flay signs a contract to take his place as Dr. Death, and watches the reel of film from Toombes' apparent death in his home – only to see Toombes himself, burn-scarred but very much alive, walk towards him. When Toombes demands why Flay wishes to destroy him, Flay rages that he had written the Dr. Death role for himself, but was passed over in favour of Toombes; he murdered Ellen to frame Toombes in the hopes of destroying his career, but was still not given the role. He then reveals that the contract that Julia had discovered stipulated that if Toombes died, Flay would take over as Dr. Death. The two struggle into the basement, where Flay is stabbed and killed by Faye and fed to her spiders. Toombes applies makeup to his burn-scarred face, now looking similar to Flay, and sits down to dinner with Faye.
The title credits mention "special participation" by Basil Rathbone and Boris Karloff, who had died in 1967 and 1969, respectively; the film included scenes in which they had appeared with Vincent Price from previous AIP films (Rathbone from Tales of Terror , Karloff from The Raven ). Other AIP films starring Price that had scenes played in the film include The Haunted Palace, The Pit and the Pendulum, Scream and Scream Again, and House of Usher.
Madhouse is very loosely based on a novel called Devilday (1969) by Angus Hall, which bears very little similarity to the finished film. In the novel, the character Paul Toombes is an overweight and dissipated sexual predator, who may very well have murdered his wife. His famous cinematic alter ego is named Dr. Dis, not Dr. Death. A reprint of the novel was issued under the title Madhouse to coincide with the release of the film.
The film performed considerably less well at the box office than other horror movies Price had made for AIP and Samuel Z. Arkoff considered it marked the end of the horror cycle.