You don't need to be competitive, but you need to be qualified. I would assume that qualified is a lower standard. However; "how bad they want you" does factor into the waiver decision making process.
Obviously, he is otherwise academically qualified and has a nomination, as evidenced by the fact that he's on hold.
Competitiveness of grades, scores, extra-curricular and leadership stuff obviously goes into whether or not he receives the appointment. But waiver decisions are evaluated by the Academy's Chief Medical Officer or the Navy's BUMED (Bureau of Medicine & Surgery) which examines mids for commissioning eligibility. I don't think the doctors factor competitiveness into whether they can overlook the medical deficiency or not.
If I understand your post correctly, once they receive the DQ from DoDMERB they initiate the waiver process and an offer of appointment/competitiveness is NOT a factor in the waiver submission. If this is the case and my son was not granted a waiver last year then he likely would not get one this year regardless of the improved performance.
Yes, once the academy has an otherwise qualified and nominated candidate whom DoDMERB has communicated is medically disqualified for whatever reason, the academy initiates a review for a waiver. However, if the admissions/athletic/etc departments really want him, they can press whatever medical people to give him a waiver. That being said, certain things just can't be waived.
For example, there could be a candidate for admission with a 2400 on his SATs, Scripps Nat'l Spelling Bee winner, et al; Caveat is, he's colorblind. This is an amazing candidate, however he will be medically disqualified and will not be given a waiver, because color vision is essential to being a merchant mariner, and will likely make obtaining a commercial license impossible.
If he had a waiver review last year and was not given a waiver, I don't think the odds are that great that he gets one this year.
Encouraging someone to apply next year is the admissions standard practice, it's up to him to do his due diligence before investing time and/or money into something. But who knows, anything could happen with this.