Yeah, I understand what you're saying but am inclined to disagree with your opinion.
1) I have a lvl 65 rogue who has only one green item equipped. In nearly all cases yellow, orange or blue items tend to be better for me.
2) I agree that collecting item sets for the bonus stats is not worthwhile on a single character. But in a non-hardcore mode, you can keep all those set pieces on mule characters and deck out applicable characters in full sets. In this sense, sets can still be marginally useful.
3) I enjoy lots of loot drops. I find that when I'm playing meticulously and carefully comparing equipped items with drops, I enjoy much greater success than when I'm just feeling lazy and am running through a level without bothering to pick up much vendor trash. Less drops would be less fun in my opinion. Even though I know that 98% of what I pick up is going to be utter rubbish, I quite enjoy rummaging through my loot for that elusive find.
I guess if I were you I would start by applying the rare magic items mod (or a variant of it) and then on top of that, create a new items class for something like "super elite" items. Define how many and what kind of mods will appear on these weapons and take things from there.