You should be able to Override -> Enable -> False the MSSQL on Windows: Discover SQL Server Database Engines (Local) discovery for a group of Windows Computer objects, since that discovery is targeted at the MSSQL on Windows: Local Discovery Seed class which itself is hosted by the Windows Computer class.
Then run Remove-SCOMDisabledClassInstance to remove the DB Engines that were already discovered.
The Exclusion override is more designed for the case where you need to exclude a specifc instance from being discovered, not for when you need to entirely disable SQL discovery for a given server!