It has to be re-encoded on export.
Quality loss will depend upon bitrate.
As far as I know... you can't do what you want in PPro, since it does not do "smart" encoding
I've read that the $75 http://www.videoredo.com/en/index.htm will do smart encoding... so only what was actually change is recoded
I haven't used it for a while, but VideoReDo Plus is only $50, and has all you need for this task.
It will basically do cuts only editing, but allows "frame accurate" cuts (rather than only on gop boundaries).
Copy the DVD files to HDD (you can sometimkes skip that step), you make any edits and/or file combinations, then export as an mpg. It uses an MPV rather than M2V designation for its demultiplexed file. I have not tried that in Encore.
It has limited datarates, but you are only going to get the smart rendering benefit if you use the "no change" option. Ultimately, it will keep the same qu ality you had, but since it was on a DVD, that may not be as high a datarate as you would have like.
Then bring those files into Encore to author.