What if you took a bike that was SLIGHTLY too small for you but then adjusted the seat to a high setting and raised the handlebars as much as possible (maybe even a little more with a stem riser). How differently would it feel or handle compared to a bike that fit you better?

FWIW, this is a somewhat inexpensive bike that'll be used as a back-up bike for occasional rides . . . my "B" bike if you will

I do this. Tall seatpost with tilt adjust and rear offset with aftermarket saddle back a ways. Ahead stem out around 80~100mm with 40* rise, and maybe 3" rise bars with 9* backsweep. Feels good. It's actually a nice change from my regular bike with lower bars. I switch back and forth.

My wife is even more upright on her bike, but is slowly coming around to a more regular fit ...

Yes you get forward out of the saddle standing into the pedals, but that's OK for a B bike

I would get a longer stem instead of a taller stem and bend over more.