My state disburses vast amount of money through a purely merit-based scholarship system. In practice, what this means is that there are now a lot of very rich students at the state universities. It did keep wealthy students in state for college, if that was the goal. I don't find that much of a goal. I think the real reason behind this is right there in your quote:
"Raising the tuition and then offering a 25 percent scholarship to four wealthier kids who might otherwise have gone to private school generates more revenue than giving a free ride to one who truly needs it. Incidentally, enticing these students also helps boost a school’s rankings. "
