It's not a big performance hit.

It's not lighting/rendering raytracing, it's the same math that hitscan guns do. Draw a line between point A and point B, if the ray collides somewhere in-between, then that line is not a valid visibility line.

You can cut down on these checks considerably if the player's camera isn't even pointed at another player, or if they are out of range.

Most FPS games are typically run by big studios on big servers that have plenty of computational power for this.