The Competition and Markets Authority (CMA) said that uncertainty about future funding, including whether council fees will cover the full costs of care, currently means that there is not enough investment in new accommodation for council-funded residents.
Meanwhile, the report said that the basic information and support needed is often not available to help people navigate the system and make informed choices while going into care.
The final findings of the study said it had identified a funding shortfall of £1 billion a year across the UK because councils are paying fee rates for the residents they fund which are below the costs care homes incur. This, has, it said, led to care homes propping up their finances by charging higher prices - an average of £44,000 a year - to those who pay for their own care.
There are around 42,500 care home beds for the elderly in Scotland, 59 per cent of which are in nursing homes.
CMA chief executive Andrea Coscelli said: “Care homes provide a vital service to some of the most vulnerable people in our society. However, the simple truth is that the system cannot continue to provide the essential care people need with the current levels of funding.
“Without substantial reform to the way that councils plan and commission care, and greater confidence that the costs of providing care will be covered, the UK also won’t be able to meet the growing needs of its ageing population."
He added: “It is essential that residents and their families can make informed choices, understand how these services will be paid for, and be confident they will be fairly treated and able to complain effectively if they have concerns. We are now calling on care homes, councils and government bodies to help people navigate what can be a confusing system.”
Alex Hayman, managing director of public markets for consumer watchdog Which?, said: “These findings echo the heartbreaking stories we’ve heard from hundreds of people who have struggled to find appropriate local care for themselves or a loved one.
“The Government must now act on these important recommendations and ensure that their Green Paper delivers the fundamental reforms needed to secure high quality, affordable care for older people - both now and in the future.”
The CMA said it had made recommendations to the Scottish Government, the Care Inspectorate, local authorities and Integration Joint Boards, as well as the industry across the UK to address the issues and added it will be taking steps to assist care homes in understanding their obligations.
"We are also taking enforcement action now on some issues where we believe the law is being broken," it added.