Well, DR kicks in on every attack landed, so either it scales well and everybody wants armor because it's so good, or it doesn't scale well and looks good for the 1st few levels before going obsolete.So....refreshing temporary HP while wearing armor....mechanically, whats different about this than Damage Resistance?
You are hurting their AC just as bad as they are hurting yours. Nat Armor would be degraded just like regular armor (though some sort of fix is needed to deal with the monsters with loads of NA and huge HD for their CR), so fights start off with less damage than expected being dealt, and escalate into larger amounts of damage being dealt, making combat for both opponents more lethal as time goes on. It's not worse for that one player, but more dangerous for everyone (which is nice for grinding combats)Also, the broken-armor thing is well...kinda broken. If you are fighting a group of creatures, and you can expect to reduce their number (and incoming damage) each round, then maybe your steadily-breaking armor might keep up. But if you are fighting a single large enemy that will take several rounds to die and they manage to overcome 130 damage in one round, then it's only going to get rapidly worse from there. It's an interesting idea, certainly, but I'm just not seeing how it might work yet.