A local doctor's plan to build an out-patient surgical center that would compete with Frederick County's only hospital is fueling a debate here at a time when the state is trying to limit hospital expansion to control health care costs.

A group of 40 doctors, headed by Frederick County physician James A. Frizzell, announced plans last week to build a $7.5 million out-patient surgical center near Frederick Memorial Hospital, the county's only full-service medical facility.

The proposed 80,000-square-foot surgical center would include medical and dental offices, a pharmacy, a laboratory and several operating rooms to perform more than 200 surgical procedures, from simple orthopedic operations to liver biopsies and cataract removals.

The 245-bed hospital, however, is currently undergoing a $24 million expansion, in part to increase the number of surgical cases it can handle on an out-patient basis.

The doctor's group maintains that it will be able to perform the surgery at nearly half the cost of the hospital, and the threat of competition between the two is causing concern among county and hospital officals.

"It's going to cut into our business, so we're obviously not in favor of it," said Scott Grove, a hospital spokesman.

Last week, the Board of County Commissioners rejected a request by the doctor's group for a $6.1 million in industrial revenue bonds to help build the surgical center.

Officially, the group was turned down because commercial ventures are a low priority under the county's criteria for issuing the bonds, said county economic development director Donald R. Date.

But according to other officials, the commission was privately concerned that the center would jeopardize the hospital's ability to repay $20 million in general obligation bonds floated by the county last August to finanace the expansion.

Unlike the revenue bonds, the county backs general obligation bonds with its own credit-worthiness. If the hospital had difficulty repaying the bonds, it could threaten the county's AA bond rating, one official said.

"They're a little nervous about it. That's one reason why the county commissioners didn't want to support us," Frizzell said.

Beyond those immediate concerns, however, the debate also raises questions about the long-term impact of private surgical centers on older, established, full-service hospitals.

The federal goverment, through Medicare and Medicaid, has been encouraging the construction of private out-patient surgical centers for the past several years, Frizzell said. It will pay 100 percent of the cost of an operation at a free-standing center, compared with 80 percent for the same operation at a hospital, he said.

Last year, out-patient operations made up more than half of all surgery at the hospital and are expected to increase in the future, making it one of the chief sources of revenue there, Scott said.

The planned Frederick center will be the third of its kind in the state. A similar facility already is operating in Baltimore County and another is scheduled to open in April in Howard County, state officials said.

Because the Frederick center would contain doctors' offices, the group is not required by Maryland law to obtain a state "certificate of need" to build the facility. The state normally uses the certificate process to help control medical costs by limiting the duplication of services or expensive medical equipment in a given area.

The Maryland General Assembly is considering legislation to close the loophole.

In the meantime, if the clinic is built the doctor's group intends to install an expensive scanner to perform diagnostic tests, even though similar equipment already exists at the county hospital, Frizzell said.