The viability of care homes is under threat from the government’s plan to allow more privately funded customers to buy care at cheaper rates currently only available to councils, operators have warned.

The government announced on Tuesday that it would use legislation to let private buyers – who often pay hundreds of pounds a week more in care fees than councils – to pay the same price as if their care was publicly funded.

Care home operators, many of which are already financially precarious due to the Covid pandemic, fear that the new right could cause a plunge in revenue from private buyers and trigger collapses in services.

“If you do it like that without changing the rate [that councils pay], the viability of many providers will be completely undermined,” said Vic Rayner, CEO of the National Care Forum, which represents not-for-profit care operators.

Another senior industry figure added: “It could spell absolute disaster.”

On Wednesday, the health secretary, Sajid Javid, said the move was to “stop this cross-subsidisation in the system where you are having local authorities in effect being subsidised by private payers”. Currently councils can pay as little as GBP530 a week for a place in a care home, while private places can cost well over GBP1,000 a week.

But Rayner said that if the government wants to end the cross-subsidisation it needed to establish a single rate for public and privately funded care, which in effect would require a considerable increase in the rate councils pay.

Addressing the issue on Wednesday, Javid told BBC Radio 4 Today that of the GBP1.8bn a year going to social care, about GBP1bn would go to councils to set what he called “a fairer cost of care”.

“We have got to raise the rate that local authorities can afford and that needs to work its way through the system and we’re confident this money can do that,” he said.

But several billion pounds a year will be needed to do that, according to Paul Saper, an expert on the care sector and director of the LCS health and social care charity. He said the additional money announced this week might allow for an increase in the amount councils pay for care of about GBP40 a week on average, when increases of several hundred pounds a week were needed.

“They are going to have to find many billions more to go into the councils’ budgets,” he told the Guardian.

Private care operators often rely on a mix of council funded and private paying customers. The higher rates charged to private customers allow them to generate returns expected by the banks and private equity investors that back them. Saper said that if those returns could not be delivered, investment could dry up, meaning rundown homes fall into worse repair and too few new care homes are built.

Meanwhile, Javid defended the government’s decision to exclude food and lodging from the GBP86,000 cap on lifetime care costs, a move described as “misleading” by the Institute of Health and Social Care Management because it meant total costs of a stay in a care home could considerably exceed the cap. He said: “We all face those costs whether we go into social care or not and that’s why the government provides a state pension to meet those costs.”

The 2011 Dilnot Commission, on which this week’s reforms are largely based, had proposed leaving out the so-called “hotel costs”.

Andrew Dilnot, its chairman, said on Wednesday he thought it was “correct they are not included” and that to do so could create an unwelcome incentive for people to move into residential care out of their own home, where they would automatically be paying their own food and shelter costs. He said he was “delighted action has finally been taken” on social care, but he said he wanted the cap to be lower, the means-testing threshold to be increased and for more urgent funding to improve care immediately.

“We still have got the challenge of funding the existing means testing system properly,” he said. “These changes won’t take place for a couple of years and in the interim and thereafter we have got to make sure that we put enough money in to look after the most vulnerable who have no income or wealth of their own they can use.”

The Department of Health and Social Care has been contacted for comment.