Headly was born in New London, Connecticut. She is a member of Mensa and speaks French. Headly was an ensemble member of the Steppenwolf Theatre Company from 1979 – 2005.

On television, Headly had a recurring role as Dr. Abby Keaton on ER from 1996-1997. She has also had recurring roles in the series Encore! Encore! from 1998-1999 and Monk from 2003-2004. She has been nominated for two Emmy Awards, for Lonesome Dove (1989) and Bastard Out of Carolina (1996).

Headly has starred in such films as Dick Tracy, Mr. Holland's Opus and Eleni, which she starred in alongside her husband John Malkovich, to whom she was married from 1982 to 1990. She studied ASL (American Sign Language) for her role in Mr. Holland's Opus.

On stage, Headly starred opposite David Hyde Pierce in the play, The Guys. Pierce played a fire chief attempting to write the obituaries for his men lost in the September 11, 2001 attacks on the World Trade Center, and Headly played his editor. Originally performed in New York in December 2001, the West Coast version premiered in July 2002 with Helen Hunt and Tim Robbins and has had a revolving cast ever since.