Great post on an important subject. In designing games I always feel like I fall back on this mechanic, especially when in the case of taking wounds. It just feels logical, since the more you are hurt, the harder it is to achieve further goals. Unfortunately, you're totally right in that it is not a proper discouragement of avoidance, and more just makes players discouraged... well, often in terms of fun. It doesn't lend itself well to an epic campaign, but it feels too ingrained to remove and just have the health number decrease without consequence. Ironically, there have been some computer games which have used the death spiral in an audio/visual way, by blurring or obscuring vision, slowing movement etc. These seem to click and change behaviour more directly than the abstraction of a -X penalty.
Notice, by the way, that in, say, action movies, the characters often get wounded multiple times but still continue fighting as though nothing has changed, other than perhaps grunting and panting a bit more. And often even when it does seem that the battle has severely affected them - for instance, they can no longer stand up and continue fighting while lying on the ground - it doesn't really seem like their enemies are having any less trouble fighting them.
So, that's an example of how it might 'make sense' for HP to drop without affecting the ability to fight.
P.S. You could always have the players drink a shot each time they're wounded.
I seem to remember there was a game that actually did that in one of the TRO Design Challenges.