Unfortunately, the limit was increased as much as was possible. The item generation system is a fundamental mechanic in the game, and changing it would have an impact on many other systems, implicit and explicit, requiring very thorough testing to implement. The more widespread the effect the greater the chance of introducing bugs or unintended consequences, and the risk of causing problems that could effect many more people was judged to be greater than the chance of hitting the item limit.
When the item generation system was first designed, the number of handles seemed to be practically unlimited, so there was no reason to make it overly complicated by reusing handles, etc (it is certainly possible, but requires very careful bookkeeping to make sure the associated item really is gone and nothing will check for the original item using the reassigned handle). As development progressed, the game grew significantly, but even then no one hit the handle limit in D:OS Classic until after the issue was identified and the limit increased in the Enhanced Edition. For D:OS Classic, I have seen 2 reports of this, both with play times of 550+ hours. It was only with changes in one of the EE updates which increased the demand for handles (more items being classified as global, rather than local) that this resulted in the limit being reachable by a great deal of crafting/trading/looting, or leaving the game running and checking merchants periodically.
