Poor baby :( How old is this pic? Do you have a current one? There really is no way to cover that area. If you can let it scab over, don't scrub it off. If he's rolling and it's peeling the scab off you may need to increase the number of times you're cleaning it. Again don't scrub, just wash out the dirt and crud gently so you don't disturb the good tissue trying to grow. Also what are you cleaning it with? I'd use either a simple soap and water solution or saline a few times a day and cover it with honey. There's a salve called SWAT that you can get that will also help keep the flies out of it.
As for the saddle issue, is there someone that can come out and help you fit him? Maybe there is a way to pad so the saddle fits better? My QH gelding is very narrow, high withered with a very thick barrel. Semi QH bars are too small but the full don't fit his wither right. I finally found a built up, cut back saddle pad that fills in the area around the withers and takes the pressure off the withers. It's not exactly perfect but we do very light trail riding and I've not had any issues.
Riding: The art of keeping a horse between you and the ground. ~Author Unknown