I like where you're going with this.
The "5 Room Dungeon" principle works. I used it in designing my Tekumel megadungeon (the Jakalla underworld) for my EPT (1975) game. Each level is really just a collection of small, self-contained dungeons.
For example, the party started at the first entrance I showed them. They went down into some catacombs (a complete mini-dungeon) and before completely exploring them started to deal with a functioning underworld temple (The Black Abode of Putrescence Triumphant, to Durritlamish). Even though they beat the roughest encounter, they didn't seal the deal (lost their nerve I guess)! Then they moved in another direction and plundered a mini-dungeon called The Tomb of Kalvar the Cruel. It remains to be seen where they're headed next. There was a pit-shaft out of Kalvar's tomb down to the Tomb of Jirek the Relentless (buddies to the very end!) but they were too scared to go down it.
In my own game, each session is designed as a single foray. Theoretically, characters who remain in the underworld at the end of the session have to roll on the Table of Despair ("Your flesh is consumed by underworld denizens!", etc.), which has no positive results. So the game is for whoever shows up, and there's no problem of "Bob's character is here, but Bob is in Seattle" or whatever.
On the question of trying to "clear level 1", I see the point of just reducing or removing XP. You could also make it so darn big that they'll never do it, or just leave enough room for expansion that previously unknown areas open up later. But what you're doing could work.
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