Electronic copy available at: http://ssrn.com/abstract=2000186
The QE Principle
The Economics of Measuring Quality and Efficiency
The Production of Products and Services for the Consumer
Written by George Ricci
QE Foundation, Inc.
Introduction and Definitions
Although economics includes the study of production of products (goods) and services
for the consumer, it devotes only a small portion of that study to the topic of efficiency,
and it is primarily limited to the terms of production input and output, and an even lesser
portion to the general topic of quality. This article increases those portions with a new
concept and model for their application in economics.
What is the economics of quality and efficiency from the standpoint of the producer of
products and services for the consumer, and how is it possible to consider both quality
and efficiency in producing products and services to satisfy both producer and consumer?
We answer this question with simple, but objective, definitions of quality and efficiency.
Quality is defined as the maximum degree of performance satisfaction by the producer
that is required to meet the needs of the consumer.
Efficiency is defined as the minimum degree of performance satisfaction that meets the
consumer’s needs using the least amount of resources, including time, effort and expense.
Note: Cost-effectiveness is a term that is sometimes interchangeable with efficiency.
Although quality, itself, may be hard to measure from a strictly objective point of view,
we can describe satisfaction in one of three ways, such as, being less than satisfied, more
than satisfied or simply satisfied. Efficiency is easier to measure because we can more
easily quantify time, effort and expense.
In understanding the economics of quality and efficiency, we first must quantify the
producer’s financial revenues available to produce the products and services. Secondly
using as much historical data as possible, we quantify the projected costs of satisfying the
consumer’s needs. Thirdly, we quantify the actual expenditures made to produce the
products and services for the consumer.
After quantifying these three measures in terms of dollar amounts, we then combine the
definitions of quality and efficiency into a new composite entity QE, and define it as the
maximum degree of performance satisfaction to meet the minimum projected cost needs
of the consumer using the least amount of time, effort and expense.
Electronic copy available at: http://ssrn.com/abstract=2000186
QE is quantified by measuring the relationship of the producer’s revenues, expenditures
and their projected costs of the consumer needs. The economical model of quantifying
QE is called the QE Principle © and it is a method of balancing quality and efficiency in
a way that quality is not sacrificed for efficiency and vice versa. In other words, it is a
way for quality control professionals to balance their work with the work of efficiency
accounting professionals and vice versa in order to produce a quality product or service
for the consumer as efficiently as possible.
History and Development
The idea of the QE Principle began in the late 1970’s when I was inspecting and
evaluating the viability of health care facilities in terms of their perceived quality of
service and their actual costs of providing that service. I was trained to determine if
facilities provided sufficient quality of services according to existing standards and to
audit their costs according to existing standards in providing those services. Of particular
interest to me was the disjointed relationship between regulators who determined quality
service standards and with regulators who determined allowable reimbursement costs for
those services. The disjointed relationship was caused by the myriad of complicated
regulations and standards of care between Medicare, Medicaid, private insurance and
private pay patients. The concept of the QE Principle developed over time to determine
which health care facilities I thought were doing the best job of operating their facilities.
Instead of evaluating these facilities via unconnected separate determinations of their
quality and efficiency, I combined those determinations into a connected evaluation of
determining how each facility balanced their quality and efficiency.
This balance was not only important in evaluating facilities, it also addressed the issues
of out of control rising health care costs and why more was being spent (or wasted) to
provide less quality care. The QE Principle’s (quasi-econometric) model and formula
would reveal cases where either facility costs were increasing while their quality care was
decreasing or vice versa. Facilities that were cited for poor quality would spend more to
correct their deficiencies, and facilities that were cited for having too much cost would
reduce the quality of care. A facility could go out of business either through a closure for
poor quality care or a bankruptcy due to over spending.
Model and Mathematical Measurement
The actual model and measurement of the QE Principle is represented by a triangle where
the length of each side is transposed into dollar amounts. One side represents resources
or revenues available to the producer. Another side represents projected costs to meet (or
satisfy) the needs of the consumer. The third side represents actual expenditures made by
the producer to meet those needs.
There is, however, a solution to these problems. The solution entails the use of new
methodologies designed to increase consistency, continuity and cohesiveness in the
production of services and products for consumers, and hence increasing quality and
efficiency of the services and products. It is also a solution (coincidentally) to a cost-
effective creation of more and better jobs in all sectors of our economy. The name given
to this methodology is the QE Staffing & Scheduling Methods © (AKA QE Methods).
Although the development of the QE Methods was a byproduct of the QE Principle, each
can be used separately as solutions for various problems. The QE Principle is a solution
for measuring quality and efficiency. The QE Methods are solutions that increase quality
For more information on the QE Principle or the QE Methods contact the QE Foundation