Let me preface this with both my dragons are on tile..
Bowser came on alfalfa pellets when I bought him. As for them eating it, he might eat one pellet a month, but I doubt it.. I've watched him grab crickets and get a pellet stuck to his tongue.. He very easily spit the pellet out and chewed up the cricket.. Even the ones that he bit in half he'd spit out.
As for the sanitary issues, it sort of turns to hay, but it more absorbs all the liquid in the top layer, and is easily scooped out. The stuff is dirt cheap, you could probably dump the whole cage out once a week and clean it for a few bucks a year.
Like I said, mine are on tile now, just because I think its easiest to be able to wipe up the poop, but I don't really see any issues arising, especially with an adult on rabbit pellets.