No they don't know, and even if they did it's not a huge deal. Many of my interviewers were simply curious about the schools I was applying to and had nothing bad to say about any of them when I told them. This is not as ruthless a process as you may think; many schools just want you to go where you will be comfortable. The schools think of you more of a person and less of a number.
The benefit in applying to more schools is simply to increase your odds of getting in somewhere. The only downside is the cost.