No, I wouldn't use shape keys to make LODs. You can just store each LOD and the physics hull on their own layers. Then, you can just select them one by one and export them out as dae. Make sure you have "export selected" checked. (If you are using Blender 2.5x, the dae exporter isn't complete and can't just export a selection; therefore, it is more tedious because you'll have to delete all the objects except the one you want to export.)
As for workflow, I build up from low to high in Blender usually unless I sculpted something in Zbrush first. I make the physics mesh last. I use the low version of the model as a starting point for that one and remove edge loops aggressively.