Yes, 1mb/hPa is equal to approx 27ft at sea level ISA (1013.25 @ +15oC). The higher up you go, the colder it gets, the less dense the atmosphere, the more altitude each hPa is equal to.This continues till approx 56,000ft if I'm not mistaken. Above 56,000 the temp increases with altitude as you enter the ionosphere?(it's been a long time, correct me if required). Adove this altitude, conventional altimiters are not used.
The senario you give would indeed break the required separation standard of 1000ft vertical, but should never happen because of the Transition Layer. Each country or region will have a fixed transition altitude (TA) which will be calculated individually depending on the highest obstacle in that country or region. As an aircraft passes through the TA the pilot will change the Alt sub scale to 1013 and oberate on FL above. Depending on the aerodrome pressure, QNH(alt) or QFE(height), the Transition Level will be calculated and will be the Lowest useable FL at that time.
The Transition Layer will always be there and it will always be 1000ft - 1500ft thick.
For example: If the TA is 5000ft and aerodrome QNH is 1014 then the TL is FL60, but, if pressure drops by 1hPa to 1013, then the TL becomes FL65. The TL will be adjusted as necessary to maintain at least a 1000ft buffer.
I know a guy who makes TransLevel computers for ATC units if anyone wants one. Simple little things that fit in a strip holder. Very cheap, and effective. PM me for details.