Three wards for mentally ill patients, including some with dementia, could be closed in Devon and care switched to people's homes.
The Devon Partnership Trust (DPT) wants to redistribute money for hospital care in the community to cope with increasing numbers of patients.
But the move has been criticised by Alzheimer's disease campaigners.
But the DPT says its eight wards, which care for 8% of patients, take up about 70% of the psychiatric services budget.
Dr David Somerfield, co-medical director of the DPT, said: "It is very difficult to justify the number of beds we have.
"If we have better resources to support people earlier then we are not going to need so many in-patient beds.
"By and large patients and carers want to stay at home for as long as possible."
The change is part of a review of services in response to the national dementia strategy launched in 2009.
The DPT estimates that more than 17,000 Devon people will have dementia by 2021, up from 12,000 in 2009.
Andy Mack, chairman of Exmouth Alzheimers Society, said: "They are taking money out of the hospitals to put into the community and are taking away the safety net.
"They are taking out of one pot to put in another pot and trying to spread the money as evenly as they can."
The DPT said the shift in emphasis from inpatient care to community care had been under way in Devon, and across England, for several years and would continue.