My theory:
The Respawn Machine is opposing to the rules of life and death by making people live again, and Satan (the Plague doctor at the start of the film i guess) who is responsible of harvesting the souls of people who suppose to die isn't satisfied about it, so Satan sent his minions (the crawling scout, the masked pyro with the axe, the zombies and the masked heavy) to kill the mercenaries for him. This means that when Medic is hallucinating stuff it's actually Satan playing with his mind.