The owners of four care homes in Pembrokeshire are going to court in a bid to force the county council to increase the fees it pays them.
They will tell the High Court in Cardiff they will have to close as the income does not cover their costs.
The council said it paid a similar level to many in Wales and more than others, and was confident it would win.
South Pembrokeshire MP Simon Hart said he hoped the “test case” would provide a solution for 86 residents affected.
The High Court will be asked to decide whether the council should immediately start paying more money while the longer term dispute is resolved.
The care homes involved in the case are Pen-coed in Saundersfoot, Langton Hall in Fishguard, Woodfield Care Home in Narberth and Woodland Lodge in Tenby.
This case will be watched closely by local authorities up and down the country.
It comes at a time when they are all under pressure to cutback on costs. If the court ultimately decides in favour of the care home companies it could set a precedent which would see other councils having to pay more.
The care sector is undergoing a massive transition – demand is up because of an ageing population, while the income to pay for it is unlikely to keep pace.
In some areas that’s already lead to a move away from traditional residential care, and the offer of more support for people in their homes. It is a change which can promote more independence while helping to keep down costs.
But it’s not a solution that suits everyone.
Funding residential care will therefore remain an issue, and in this case the tension between council budgets and the companies who run homes is laid bare.
Care Forum Wales, which represents independent care providers, will provide written evidence on their behalf.
Senior policy advisor Barry Latham said: “These cases appear to be symptomatic of wider problem in the social care sector which is causing a postcode lottery in relation to the provision of care in Wales.
“As around 75% of residents in care homes are publicly funded, the fees which local authorities pay for their supported residents have a critical impact on the financial viability of care homes.”
Pembrokeshire council leader John Davies said it was the responsibility of councils to set fees.
“We are firmly of the view that we have done this fairly and we have used a nationally recognised financial model to assist us,” he added.
“We are confident that the council’s position will be upheld by the court when the full facts are explained in the hearing.”
Conservative MP Mr Hart said: “This is going to be an extremely interesting case and I’m sure that a lot of people will be watching the outcome closely.
“I sincerely hope that a solution will be found and that the residents from the four homes affected will be able to stay put.
“I am particularly worried about those who live at Woodfield as I understand it is one of only five nursing homes in the county that can take Elderly Mentally Ill (EMI) residents and so they are particularly vulnerable.”
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