Why not simply group gamers on different servers depending on how well they're doing or not doing?

You win a lot, you get grouped on a server with other winners, you lose a lot, you get grouped on a server with others that lose a lot.

This keeps skill levels (and challenge) consistent.

Or, is that too much of an algorithmic challenge for the game designers?

If they can write the game in the first place, it shouldn't be...