OBJECTIVE: To examine the association of the growth in free-standing ambulatory surgery centers (ASCs) with hospital surgery volume. METHODS: Secondary data analyses of the1992-2001 American Hospital Association annual survey files, the 2003 Medicare Online Survey Certification and Reporting System, an HMO penetration file, and Area Resource Files. We construct a balanced Metropolitan Statistical Area (MSA) panel dataset including 317 MSAs from 1992-2001. Ordinary least squares regressions with MSA and year fixed effects are used to control for MSA-level heterogeneity and time trends. Three dependent variables are the log-transformed hospital outpatient, inpatient, and total surgery volumes. The key explanatory variable is the number of ASC's per 10,000 people. Other covariates include HMO penetration, hospital concentration measured by the Herfindahl-Hirschman Index, supplies of surgeons and physicians, and demographic and economic characteristics. RESULTS: From 1992-2001, hospital outpatient surgery volume at the MSA level increasing by 23% from 58,783 to 72,111 while inpatient surgery volume decreased by 12% from 50,778 to 44,911. During the same period, the number of ASCs per 10,000 people increased by 143% from 0.07 to 0.17, HMO penetration nearly doubled, and hospital markets became less competitive. In regression analysis, the growth of ASCs was inversely associated with outpatient and total surgery volumes (p<0.01) but was not associated with inpatient surgery volume (p>0.10). Other thing equal, an increase in 1 ASCs per 100,000 people is associated with a decrease of 4.1% in outpatient surgery volume or an increase of 1.8% in total surgery volume. CONCLUSIONS: Our study suggests that ASCs may lead to a decline in hospital total surgery volume, largely driven by decreased hospital outpatient surgery volume. Additional research needs to focus on the impact of ASCs on hospital provision of charitable care and quality of care.