WHEN MARK ELLIS came aboard Home Care Services eight years ago, the Hagerstown, Md., home medical equipment company already boasted a hefty chunk of retail business, thanks to an affiliation with three local pharmacies that allowed it to sell HME in their stores.

That did not please Ellis. The director of Home Care Services saw retail as a liability. It demanded a lot of overhead, in inventory, personnel and space. "I looked at retail as a pain," he says, adding that he was seeking ways to cut back on it and focus on some other aspect of HME.

He's glad now that he didn't. When the Balanced Budget Act of 1997 kicked in with its reimbursement cuts and a host of other regulatory restrictions, the retail sites made a real difference for Ellis' company. The strong retail arm of the business especially helped to holdup the respiratory end, which took a 25 percent hit in reimbursement last year and another 5 percent this year. "It's been the saving grace," Ellis says, noting that retail revenues from HME have climbed from 15 percent of the company's total to between 20 and 25 percent.

The key to that success has been diversity. The retail sites-which have grown to five pharmacy locations and a freestanding showroom, all within 10 miles of each other-are near physician groups or hospitals, and all serve different niches, Ellis says. The one near an orthopedics group, for example, does more fittings of orthotics and prosthetics, while the site near a group of pediatricians focuses more on such things as aerosol treatments. The showroom handles most sales of beds and wheelchairs.

"We don't have to have all the equipment in every store," Ellis says. Indeed, that has been just one of the benefits in aligning with a pharmacy. Not only is inventory less, but so is overhead because it is split with the pharmacy. And the HME areas, which are smaller than full-scale showrooms, require fewer salespeople. A "clinical representative" is always available, Ellis says, noting that the person is thoroughly trained in the various HME products. Another bonus of the arrangement: Customers like the idea that they can pick up HME supplies and a prescription at the same time.

All in all, retail revenues have helped Ellis stabilize the business even as other HME providers have sold out, closed up or fallen victim to declining revenues. Home Care Services gross revenues grew 24 percent last year and 13 percent this year, to about $4.3 million.

Ellis is quick to point out that the net revenues have stayed the same. "We're working harder, not getting any more," he says, "but our bottom line is staying the same."

In the current reimbursement climate, that's a real achievement.