the Jester
Legend
Not PCs (and possibly NPCs).
Okay.
This is definitely not to my taste for multiple reasons, the above being one. Another is that it seems like a lot of complication for no real pay-off. A third is an echo of what Blue said- death spirals totally suck, at least to me and in my experience. From your OP:
The goal here is to create a fun system that presents interesting choices for the players while making the line between 1HP and 0 HP a little blurrier and adding longer lasting consequences for dropping to 0 HP.
This does what you want except for the "fun system" part. The thing is, under this system, every truly challenging encounter is going to lay exhaustion on your pcs. I think you're more likely to find that you've created a system that forces your pcs toward an extremely cautious approach that is rather at odds with heroic styles of play. If that's what your after, cool- this will probably do the job- but I'd definitely survey your players about this before imposing it.
Now, this does make the line between 1 and 0 blurrier. But part of the way it does that is by inflicting some of the "0 hit points" penalty on pcs with 1 or more hps, in the form of exhaustion penalties. Again, that's cool if that's what your after, but it sounds like a lot less fun than "I can function properly" in play.
This does also enforce longer term consequences on creatures that drop. However, I'd go deeper here- why is it that you want that to happen? Do your players treat 0 hit points as no big deal? If that is the real issue, I'd suggest a more elegant strategy- sometimes, the monsters should hit them while they're down. If this happens even once, it makes the players in your game treat falling to 0 hit points with far more trepidation than otherwise, especially if you actually kill a pc like that. Now, it sounds like your playstyle is far more forgiving than mine, and it might not support going that far, but you might find another solution to the problem you're trying to address with these consequences.
Anyway, good luck with whatever you decide on- I hope you find something that works for your group.