In theory the method of payment should not impact your upgrade prospects. The downside is that all too often many members experiences seem to be that they do not get upgrades very often when using points. I think it really is impacted by the property you select, your status and sadly the person working when you check in. That being said, I have been upgraded on points at some properties (though mostly in Europe) and have actually called ahead to make sure I got the room type I wanted/needed when using points in the US. In some cases I have negotiated a slightly higher point rate to get a 2 bedroom suite at a property instead of the studio/normal room. If you are in a situation where you have to have the better/bigger room, try working with the folks on the platinum line and see if they can call the property and negotiate something for you to ensure the room you need....worked for me many times :)
Good suggestion zukracer. I've often wanted guarantee something better than the standard room instead of just hoping I'll get it upon check-in. I know some of the properties offer upgrades you can reserve for points or $, but those seem to be mostly the resorts.