O N NOVEMBER 6TH the Care Quality Commission (CQC), which regulates health and social care, took the unusual step of warning local authorities that a care company was at risk of collapse. Allied Healthcare, which provides services such as washing and meals to 9,300 elderly people in their own homes, insists there is nothing to worry about. Yet councils are preparing for the worst.

Allied’s difficulties are a reminder of the pressure on the care sector. A higher minimum wage and tighter regulations have added to care providers’ costs. At the same time their main customers, local authorities, are facing funding cuts and are reluctant to pay more for services.

This disjuncture is most evident in care homes, a business worth about £16bn ($21bn) a year, with over 400,000 residents. The number of people over 85 is expected to increase by 36% by 2025. Yet care homes have been closing, unable to make ends meet. By one estimate England has lost 3,700 beds since 2012.

It hardly looks like a promising market. But one corner of the industry has attracted the attention of investors, including foreign funds, which have been snapping up British care homes. By changing the way such homes operate, and rethinking who their customers are, investors see a way to make a good return. But with this change comes a widening gap between north and south, as well as between rich and poor.

Take Skylark House in Horsham, Sussex. The spotless, two-year-old facility has 82 bedrooms, each with an en-suite wetroom and most with a balcony. It is owned by Care UK , the fourth-largest provider in the country, which has built 40 homes since 2011 and has 33 more in the pipeline.

Care UK’ s boss, Andrew Knight, argues that the only way to provide this sort of care is to take more residents who pay their own way. Councils in England are obliged to pay for anyone with assets of under £14,250. But often the council’s contribution does not cover the full cost. In Care UK ’ s homes, councils pay about £650 a week, whereas “self-funders” pay £900. Care UK used to work mostly for local authorities. Now half its residents are self-funders. Mr Knight says he will no longer provide beds at below cost. That will rule out most local-authority customers, but means the company can operate with margins of about 10%.

The self-funding market has caught the eye of American investors, primarily real-estate investment trusts ( REITS ). The biggest in Britain is Welltower, which has 107 care homes with 7,500 beds, worth £2.2bn. Only a few of its homes take council-funded residents, as the firm prefers to “avoid the risks of dealing with the government pay sector,” says Justin Skiver, an executive. Other REITS buying homes include Target Healthcare and Impact Healthcare.

The care-homes market is still fragmented, with about 5,500 operators. The five biggest have just 15% of the market between them. Some see scope to grow by acquisition, gaining economies of scale.

The investments will increase capacity and may spur innovation. But the price is a bigger divide between those who can pay and those who cannot. And there may be a hidden cost to the taxpayer. As providers focus on self-funders and council-funded beds dry up, hospitals could find themselves taking up the slack.