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Tenet Healthcare

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has chosen El Paso, Texas -- home to a huge uninsured crowd -- as the site for its first brand-new hospital in years.

The struggling hospital chain last week announced plans to expand its presence in the Mexican border town with a new $130 million facility. The 100-bed hospital will be competing against a much larger facility, owned by


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, on the rapidly growing east side of town.

"Tenet's growth strategy is to seek excellent opportunities where we can expand and better serve our core markets," explained CEO Trevor Fetter. "And this east El Paso facility is a perfect illustration of that strategy."

In recent years, Tenet has been selling hospitals instead of building new ones. As a result, the company has managed to accumulate a $1.6 billion cash pile that many assumed might be used to settle a slew of ongoing government investigations. Recently, however, the company indicated that it would use some of its cash for new projects if attractive opportunities arose.

Tenet already ranks as the largest player in the El Paso market, operating two full-service hospitals and a rehabilitation center there. But the company is now reaching out to east El Paso, in particular, an upscale region that saw its population explode by more than 40% between 1990 and 2000 and is expected to enjoy a similar boom through this decade as well.

Tenet's stock dropped 5 cents to $12.70 Friday, the day of the announcement, and -- while no longer a $50 highflier -- has, so far, jumped more than 20% in a year.

Texas-Sized Challenges

Still, at least one industry expert questions the wisdom behind Tenet's latest move. Peter Young, a business consultant at HealthCare Strategic Issues, portrays Texas as an especially tough market where the competition is fierce and the uninsured rate is particularly high. Even healthier HCA, he notes, has faced its share of difficulties there.

"For Tenet to directly compete more aggressively with HCA is a challenge that is well beyond the company's abilities based on its performance to date," Young says. "Many people may want to ask, 'Would that capital be better utilized to develop revenue lines in other markets?'"

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Last year, Medicare data show, profits at both of Tenet's El Paso hospitals fell sharply. In contrast, profits at HCA's hospital in east El Paso rose by more than 10%.

Even for Texas, El Paso looks like an especially challenging market. Notably, the

El Paso Times

recently reported, El Paso County has the second-highest uninsured rate in the entire country. The newspaper said some 27% of the county's residents lack health-care coverage.

To be fair, however, east El Paso looks more attractive than that.

"The east side of El Paso is growing at a phenomenal rate," says Tenet spokesman Steven Campanini. "There is a lack of health-care services there -- and it is mostly settled by middle- to upper-class residents with insurance."

Still, Tenet must now convince local physicians to refer patients to its new facility when they could choose HCA's larger 342-bed hospital instead. Moreover, Tenet suffers from strained relationships with physicians in some of its existing markets already. And it has attracted government scrutiny -- which can hurt patient referrals -- in none other than El Paso.

Last year, federal authorities formally requested information from two physicians with financial ties to Tenet's hospitals in El Paso. Tenet has been accused of violating government rules by paying kickbacks to doctors in exchange for patient referrals. One of its hospitals in California is currently on trial based on such allegations.

For its part, Tenet has denied any wrongdoing and vowed to vigorously defend itself. But government subpoenas, by themselves, can do plenty of damage in the meantime.

"This sends a very sobering shock to every physician involved with Tenet," Young said when the government first began questioning the doctors in El Paso. "Physicians could start backing away from some business involvement with the company."

Since then, Tenet has, in fact, weathered a drop in overall admissions. And the company itself has pointed to government scrutiny as a big reason for that decline.

Others, however, blame Tenet's capital spending program as well. They believe that Tenet has spent far too little upgrading its hospitals and has begun losing out to better-equipped competitors as a result.

Thus, they tend to question Tenet's decision to build a new hospital in El Paso right now -- even though the company says the cash it's spending on the facility comes on top of its regular capital improvement budget.

"Maybe they should spend on existing hospitals to get back market share," suggests Caymus Partners analyst Jeff Villwock, who conducts research on behalf of the Tenet Shareholder Committee, a group long critical of Tenet management. "Their entire hospital portfolio is cash-starved right now."