My group has also always treated it that you heal whenever you sleep. It just seems to make more sense, and doesn't slow the game down as much. I know its not the real rule, but I've never pointed that out cause I like it this way. I run my games that way too.
I assume that the Elves heal after a full 4 hour's trance rather then a full eight hour's sleep.
And personally, I like the Elven Trance idea... Mongoose Publishing has already come up with great ideas based on it, such as in Quintessential Elf and Encyclopedia Divine: Fey Magic.
It gives 'em some exotic wierdness...it's the kind of semi-useless cool factor that just makes sure that those who are aroud an elf know that they're in no way as cool -- not even in their unconcious.
Plus, it makes elves great late-night scouts.
It's a minor thing, but it's the kind of minor coolness that helps set the elves apart, and gives them evidence for their self-proclaimed specialness.
'I don't sleep, young creature. I experience my memories in full, glorious recollection. And I am truly sorry that you cannot...'