Hard-up Birmingham City Council is paying private care homes just £52 a day to look after elderly patients with dementia and other mental illnesses.

The amount, which has not been increased for three years, was described as “appallingly low” by the owner of one nursing home.

Ann Smith, who runs the Stoneleigh home in Stechford, said she was expected to provide 24-hour cover plus meals for £364 a week for 15 residents.

Ms Smith added: “It’s appalling. You can hardly get bed and breakfast in Birmingham for £52.”

The council’s fees structure is at the centre of a potential legal action by the Birmingham Care Consortium (BCC), which represents about 80 privately-run homes.

BCC believes council social services bosses are behaving unlawfully by freezing fees paid to homes to look after thousands of elderly clients.

The organisation is raising money to fund a high court judicial review into the city’s social care budget and this week published a newspaper advertisement claiming that city councillors should “hang your heads in shame” for treating care homes so badly.

Peter Hay, Birmingham’s strategic director for adults and communities, defended the £52 which he said was in line with amounts paid by other councils.

Mr Hay accused BCC of behaving improperly by threatening legal action while both sides are in contractural talks about future fee payments.

The council has started an open book process, which involves the home owners opening their accounts for inspection and gives them an opportunity to make the case for higher fees.

Mr Hay said BCC was attempting to “have us over a barrel” and trying to bounce the council into increasing fees by seeking legal action.

He added that the home owners could not be exempt from financial pressures facing all businesses and should have taken steps to absorb the fees freeze.

If the open book process showed that fees were too low then the council would increase payments, he promised.

Mr Hay said: “I am not going to be bullied into taking a wrong decision by people placing dramatic advertisements. If they want to judicially review us, then they are welcome to, but that means yet more money for yet more lawyers.”

The council, which wants to reduce its adults and communities budget by £118 million over four years, has recently lost two anti-cuts judicial reviews.

In April, a high court judge ruled that an attempt to axe a £1.3 million funding package for voluntary organisations was unlawful.

And last month another judge reached a similar decision over plans to save £53 million by ceasing to provide care packages for almost 5,000 disabled adults with substantial needs. In both cases the council was found to have acted in breach of equalities legislation.

BCC says some smaller homes in Birmingham are on the brink of going out of business because the fees they receive to care for council-funded clients have not kept pace with inflation, while at the same time the council has increased fees for its own local authority homes by nine per cent.

Ms Smith owns one of the smallest homes in Birmingham, with 15 beds.

She said: “We’ve been open for six years and have a large mortgage to pay. It’s really hard and we are struggling. The council don’t recognise there are increased costs associated with dementia care.

"All we are asking for is a fair cost of care to give residents the care and support they deserve. This is becoming less feasible on a maximum of £52 a day.”

BCC vice-chairman Phil Milligan warned that homes might have to get rid of staff with an inevitable reduction in quality as a result of the freeze, which has been in operation since 2008 for elderly people with special needs and since 2009 for all other elderly clients in private and voluntary sector homes.

The council’s 2011-12 budget plans to further cut fees by £15.6 million – equivalent to a seven per cent reduction.

Mr Milligan said: “This is at a time when we have seen more regulation and demands from the public, quite rightly, to improve the quality of service.

“If you look at some of the larger homes they are making money, but the smaller ones with fewer than 40 beds are finding it hard to make ends meet.”

He accused the council cabinet of ignoring consultation on budget cuts, which showed a clear public wish to protect spending on social care for elderly people.

Mr Milligan continued: “The council is preparing to cut fees by seven per cent this year. If this happens, more homes will close. Elderly people will be moved out of the homes where they have lived for many years and there is plenty of evidence to show how distressing this would be, in some cases leading to premature death.”

He estimates that the impact of the fees freeze has been to cut private homes income by about 12 per cent over three years, when inflation is taken into account. Mr Milligan added: “The council is happy to pay its own homes more money, but will not give an increase to the private sector.”

He is appealing to Mr Hay to “show some common sense” by calling off the fees freeze.

Mr Milligan said: “We wrote to Mr Hay saying we would like to meet him because we would prefer not to take legal action. We did not receive a response so we wrote again last week saying let’s meet.

"We still haven’t received a response. If they continue with this stand off, we have no choice but to take legal action.”

BCC is urging the council to make an interim award to the homes in line with inflation and to order an independent review into the way fees are constructed.

Mr Milligan, who owns the Roxton nursing home in Sutton Coldfield, insisted that BCC members were not making excessive profits.

He said: “I would absolutely be prepared to have my accounts looked at by the council. They are all in the public domain.”