Divisions do not matter all that much, in TN at least. My son's school started off big school for his first three years and then moved to small school in his senior year. Did we wrestle anyone different in his senior year because we were small school? Nope. Wrestled same public/private schools we always did. Absolutely no difference. So in the end most schools are probably going to wrestle the same old schools that are within a sixty mile radius regardless of their or their opponent's division. The better schools are already seeking out better competition so I don't think extra divisions matter there either.
I think you hit the nail on the head concerning population. When TN adds another three or four million people our overall level will rise and not until then.
With three divisions it is currently too easy to medal in TN. I know several young men who didn't practice at all in the off season (I mean zero) and medaled in big school and small school (no they weren't heavy weights or anything close to it). That shouldn't be possible, or at least should be rare even if a really good athlete, which goes back to population. The larger we grow the more difficult a medal will become (in theory), regardless of athletic ability, unless we add a truly ridiculous amount of divisions like VA or GA. This is the one thing California does right. One division, one set of medals per weight class.
18 medals per weight class in a state of 7 to 8 million people definitely seems overkill, especially when PA has two divisions and CA one division. My son wouldn't have medaled under one division and that would have been just fine. I'm clear with this information when family or acquaintances, who are sports enthusiasts, ask questions about that time of our lives. I tell them we have three divisions and that if there had been one then it is most probable he wouldn't have medaled. My son is aware of this as well, kids aren't idiots, they can survey the landscape. A lack of medals wouldn't change the gratitude I have towards this sport.