I didn't read all the topic, but I have friends that gave up beating sonic 2 because the last boss is too difficult and you must restart from the first level.
I think the way S3&K works is fine, lifes are still valuable because nobody wants to restart from the beggining of the level...
In the genesis ages, I used to loose all my lifes in harder levels and if I tryed it again, probably I would loose my 3 lifes again and again in the same point. So I picked like 2 or 3 levels before it, because they were easier, and I could get many lifes to beat that difficult level. It also gives a good replay value and would not piss me off because I had the option of playing some leves again or not.
Maybe this bring a new theory: the difficulty of the levels should not be "very easy - easy - normal - hard - teh hardness", maybe some easy levels after and before hard ones can make the game more enjoyable to play (and replay)...