By RAW, nothing happens.
And here's the more contentious answer... nothing _should_ happen, as an across the board rule.
Lots of things state if something happens if used on a creature out of surges, and that flexibility is a good and fine thing. Someone who is out of surges is already scraping the bottom of the barrel. If it's a rogue facing nabassu who do 3 surges per whack, I can assure you they weren't balanced to deal 3/4 of his hp per attack after the first 2 hits.
As for the level hp not scaling right... it's not as bad as you think. Most characters increase their surge value by ~1.25 per level, so going up by 1 per level isn't too far off. It's less scary for a level 1, certainly, but a lot of stuff works differently right on a level 1. Compare between a level 8 and a 28 and it's close enough.
No matter what, don't use healing surge value - use half bloodied if you need to. It's very easy to have a big bonus to your healing surge value (for example, a dwarf might have a tier item bonus and add their con bonus)
I agree... (+1 for you ma'fella!)
Sometimes people don't realize that throwing in powers (such as insubstantial) for the fun of it is unbalanced.
With insubstantial most creatures with this are balanced, often by modified HP or vulnerabilities... without creating a balanced monster and taking certain things into account you create a monster that is way too powerful for its level.
This is why I say if you want to make an insubstantial type, (or regeneration type) you don't choose the monster and then tack on powers, try and modify the monster that already has those powers.
Say you want to give a Kobold insubstantial... you now have to figure out what level to make it, what defenses to give it and what hp to give it since just tacking it on is not an easy thing to do.
Instead take a creature that has insubstantial of the same level... change its Wraith Strike (or whatever) power to a Spear Thrust, change its Touch of Death to a Stab of Pain and just swap around the flavor.
It is easier to reflavor an existing monster with keyword and origin, skinning them as you like than to buff the powers of a different monster without considering the other issues.
So... to get back to point
Anything in the MM that says "takes healing surges" - that is all it does.
Anything that says "takes healing surges ... and then 1 level damage if none left" - thats all it does
The devs will have factored in the extra damage it can dish out into its level and coming up with something that does twice as much (ie 1/4 level) is not something written anywhere but if it was you can sure imagine it would add tons to the level of the monster