This really doesn't LOOK like mange mites. Normally the first place you really see issues is on the ears, probably because they are relatively hairless. I have seen it on the rear end but only on squirrels that were covered with it everywhere else. The skin is ALL rough and red, not little individual sores on relatively healthy pink skin.
It is possible that this started out as a minor irritation such as ant or mosquito bites that he fussed with because they itched. The fussing irritates the skin as he bites at it, causing more sores, which begin to itch like crazy as they heal, which makes him fuss MORE at the area. You can get into a real spiral with stuff like this, and you really can't just slap an e-collar on a squirrel - not only would a flip out result, you can't keep them on their little bullet heads.
Things that itch - insect bites, that healing itch, allergies - do so because they prompt a histamine release in the body. Why don't you try the following:
Continue the diluted Betadyne wipedown of the area. Don't apply anything else to him - no salves, no creams, no neosporin, etc. Squirrels HATE stuff in their fur and will obsessively clean the area, which in this case will also involve inflaming it further. But I would also try putting him on Benadryl for a bit. It is an antihistamine, so it should block at least part of the itching. You want CHILDREN'S benadryl and if you can give us a weight we can dose it properly for him. I would discontinue the ibuprophen - you can always add it back but it would be good to see what happens with just the benadryl.
He needs to be an indoor squirrel while this is happening. If you have ever taken it you know that antihistamines tend to make you drowsy and you do NOT want a drowsy squirrel out trying to evade predators. It will also give you the opportunity to watch and see if the itching and attention to the sore area decreases.