Again, everyone can come up with the "one off example," but that does not negate the greater good of the rule.
If the 1:56 kid gets put in a heat of 2:05 kids, and he is really a 1:56 kid, and you are really a coach, what do you expect the 1:56 kid to run? I would expect him to run at worst 1:57. So now he has a time for the next meet. Problem solved.
This rule does not address that an entire team may be excluded from a meet, simply because the meet is an invitational, AND YOU WEREN'T INVITED. That is not what this rule is for.
This rule does encourage athletes to compete, and coaches to coach.
I can't tell you how many times I show up at a meet and see some really bad team, with a really clueless coach that has done a disservice to his own athletes, other teams athletes, and the meet itself by entering ridiculous marks and pushing legitimate athletes into worse heats and lanes.
There are threads every year about "who got in" to certain indoor meets in Boston.
http://www.letsrun.com/forum/flat_read.php?thread=2325375
Coaches have been left with a choice. Lie by 1 min on a 5k time, or have the athlete get left out of the meet. Lie by 25 seconds on a mile time, or have the athlete get left out of the meet. That is REALITY. This eliminates a coach having to tackle that ethical dilemma.
Greater good, same for everybody, cream will always rise to the top, good coaches and programs will always figure it out.