Contrary to popular belief, MD and System16 are quite different things, especially concerning graphical abilities.
A simpler idea would be to hack some emulator (or ideally FPGA code) to implement simple enhancements of the MD hardware :
1) backgrounds palette and sprites palettes dissociated (4+4)
2) 12 bits colors for master palette
3) 128 KB VRAM (like the Teradrive)
Hacking games for this ideal platform would be really easy (simple palette hacks would beneficiate from 12bits colors, and hardly trickier would take part of the dissociated sprites/bg palettes).
I'm dreaming of such a think for several years now
