I think in most cases prep schools are good. I haven't really heard of any problems with prep schools playing high schools, but that would be left up to the state to decide. In most cases a prep school is a very good option for kids that struggle with grades or maturity.
I don't know how I feel about kids that go to prep schools just for another year of basketball. If they're not ready to play D-1 then go JUCO. There are plenty of schools that make their teams from JUCO transfers, you mentioned Cincy, Oklahoma is another team that lives off of them.
A player like Brandon Rush is a perfect fit for a prep school. There is no question that he is ready to play for any D-1 school, but his grades are terrible and his maturity level is questionable. He transferred from his high school in Kansas City, MO and went to a school in North Carolina hoping to get his grades up. His grades weren't even good enough for JUCO, so it was either prep or go straight for the NBA. A lot of that had to do with the mistakes his brothers made. JaRon left for the NBA and is now washed up overseas. Then it was discovered that JaRon and Kareem took bribes from AAU coaches. So I think he just wanted to make sure that didn't happen to him. He has definately matured since I used to watch him in KC, so I think he's on the right track.
So I guess depending on the situation prep schools are a wise decision.