You make a good point, in that schools may be afraid to step up to a higher level for fear of loosing. I would propose schools declare their division at the beginning of the season, not just for playoffs. However, I also believe this issue is tied to player development at the high school level. I believe it is better for the players to play competitive games even if they are on the loosing end of a 1-0, 2-1 game rather then winning 6-1 or 8-0. If the coach is in it for the players they would choose the most competitive level for their team.
