+1 Good idea but in contrast to what Cooky said I think it would be fairly do able. There could be a ton of way this could be done but the way it's suggested here would probably a hassle thus I see why Cooky said it would be lots of work. If it were to be the way Bombz suggested there would have to be a different mod for each hit that they took and the transitions between these would probably be clunky.
If I were to do it I would sacrifice some of the aesthetics for functionality and an easier to make game mode. Use the already in game scoreboard (press s) so you could check how many hits everyone has once you get 10 you're out.
Edit: Just thought of this, I don't really know how the merc and player respawning works as far as graphics go but you could have everyone invisible to start out with and with every hit they receive they get a shade darker (anyone who has respawned in base will probably know what I'm talking about). The invisible part is just something I thought would be cool but not at all necessary for the idea. Don't know how the code of the game works so I don't really know if it would even work.