Law of Unintended Consequences

Organizations and people within them respond to incentives.  They just don't always respond the way that we would like them to do so.   We might have a policy designed with the best of intentions, but it may have serious uintended consequences.   Take, for example, this article from yesterday's Wall Street Journal.  It reports on a new study published in the JAMA: Cardiology.  Melanie Evans reports: 

The Affordable Care Act required Medicare to penalize hospitals with high numbers of heart failure patients who returned for treatment shortly after discharge. New research shows that penalty was associated with fewer readmissions, but also higher rates of death among that patient group.

The researchers said the study results, being published in JAMA Cardiology, can’t show cause and effect, but “support the possibility that the [penalty] has had the unintended consequence of increased mortality in patients hospitalized with heart failure.”

The article goes on to report some disagreement among researchers about the impact of this policy.  Nevertheless, it notes concerns by some physicians about the possibility of unintended consequences and the desire by many to see further research on this matter.

More broadly, this article reminded me that managers need to consider the law of unintended consequences as they establish policies, metrics, and procedures.  For instance, managers may have great intentions when they create a new incentive compensation scheme.  However, the reward system may cause behaviors that they did not foresee or intend to stimulate.  In fact, they may see some adverse effects because of the ways in which their scheme distorted behavior.   One can blame individuals for unethical behavior that emerges as people try to achieve ambitious targets and garner bonuses, for example.  Or, one could ask:  Did we create policies that unintentionally encouraged people to act in unethical ways?  I'm not excusing bad behavior, but I am encouraging to think carefully about the systemic reasons for unethical action within firms.