Two things I want to reply to there:
1. Yes, there is a precedent to retcon deaths... and it's nearly always a bad decision and / or poor writing. Just because a writer can make anything happen, doesn't mean he should. That severs the audience from the fiction. Bringing back clearly dead characters for no other purpose than fan service has no defence. I wouldn't have minded as much if there was a better reason, or better writing, and if it was only one character being retconned. I can't see any reason for Rufus to even be in the film, he didn't need to be there at all.
2. Game and Film are two different genres. If game battles were ultra realistic, there would be no game. What happens in a cutscene always takes precedence over battle in terms of plot. For example, Cloud falls through a church roof and is rendered unconscious. We accept this in the fiction because he was not left unscathed and because he is a super human. But the fiction does what is necessary, it gives us a justification for why he survived. Flower bed and roof broke his fall, he was lucky, and he is (we later find out) a super human. In Advent Children, he is slammed into a wall at 100mph, floats in the air, and is shot in the face (yeah, really!). No justification is given - it's these two things that are diametrically opposed to one another. We know that Cloud is a humanoid and it wrecks all believability.
A game battle is not meant to be taken literally (and nor is collecting balloons on a random slope)... if it was, houses would come alive (Hell House), and Cloud would survive shot gun shells (against Rufus, for example). In the cutscenes, we see Aerith die from a single stab, Cloud rendered unconscious from a fall, Tifa in a coma (almost died) from a fall, Dyne dead from a fall, Rufus dead from an explosion, Heidegger and Scarlet killed in battle (and note the death happens in a cutscene afterwards), Tifa almost killed by Sephiroth "I thought you were a goner" by a single slash, President Shinra killed by a sword to the back....and so on and so on.
It's far far more believable and better written in the game. These may sound like small things, but they aren't. They set a precedent that the characters can be killed, that they are not immortal. So you CARE about them. When you have tons of battles and anything can happen in them and your characters can survive clearly impossible situations with absolutely no justifications given, the suspension of disbelief fails and the fiction fails. This is also the reason why Game of Thrones works absolutely for the most part and why people can really absorb themselves into it.
If Tifa had summoned dolphins from thin air during a cut scene, I'd have a problem with it. But this only happens in battle. The balance of game mechanics v plot mechanics is correct and they hardly ever cross over for good reason. Fast forward to Advent Children and they broke that wall... and it makes the film absurd. Watching Cloud perform a limit break in a battle with Sephiroth in the film genre looks absolutely ridiculous, which is why a clever writer would have stayed well clear of it.
On Geostigma, I went online and the explanation given is that it was caused by Mako or Jenova cells (possibly your explanation is also valid, but it still sucks). The very fact this main plot point is in dispute only adds to the evidence that the narrative was crap.