Barring some professional school exceptions, no, it usually doesn’t work that way. A higher flunk ratio compared to other schools is an indication of either the school being bad at admissions (garbage in, garbage drop out), or is being bad in its programs or some other aspect that significantly affects students.
Producing high end graduates requires that the school first attract and then teach high end students. Of two equally good schools, to which would a high end student risk spending years of effort and tens of thousands of dollar? One that graduates its students who make the grade, or one that arbitrarily does not graduate a significant number of its students despite their making the grade?
Where it gets interesting is when (as recently) the economy has led to fewer high end students applying for admission in the first place. I had an interesting discussion a few months ago with a law prof who sits on her school’s admissions committee. Applications had tanked, so her school and another school in her city (both of them on the boundary of first and second tier), were faced with either facing major funds cuts, or lowering the standards for admission. Once school chose major funds cuts, while the other chose lowering the standards. The crux of the issue was that a few years down the road there would be lower quality graduates if the admissions standards were lowered, thus lessening the reputation of the school, which in the long terms would make it even more difficult to attract high end students. As it turned out, the first tier school decided to suck up the cuts and not ease the admissions requirements, figuring that their reputation in the long term would suffer if they lowered their admissions standards. The second tier law school decided to lower its admission standards out of great concern that they would fold up shop if they had significantly fewer students, so for them it was better to survive with the expectation of a lessened reputation than to not survive. Note that the concept of deliberately failing a certain percentage of students was not part of either school’s equation – bear in mind that the more students are flunked out, the less the schools will receive in donations from graduates in future years.
Now recall the first phrase of my post: “Barring some professional school exceptions . . . .” This is where it can get a little scary. A professional body, not a professional school, decides what it will take for a person to be admitted into that profession. A professional school’s reputation will very much be earned or lost based on the percentage of its graduates who are admitted by the professional body into the profession. For top tier professional schools, this is not a problem, for the quality of their applicants and the quality of their programs ensure that the quality of their graduates will be sufficient to make it into the profession. Lesser schools, however, may start with students who will never be good enough to make it into the profession. These students are wasting time and money. It will hurt a professional school to have a low ratio of students being admitted into a profession, so there is a tendancy to cull the deadwood prior to graduation, so that the school can say that a very high percentage of its graduates were admitted into the profession. What is not said is that when compared to better schools, more of its students dropped out before graduating. Note, however, that even then, the flunking is not arbitrary, for the school simply teaches to a standard necessary to prepare the students for the profession, and if a student is not up to snuff, then as far as flunking out goes, “If it were done when 'tis done, then 'twere well it were done quickly.”
Finally, there are diploma mills that will hand a degree to anyone who is willing to pay. Their extremely poor reputations are earned not by their high pass ratio, but rather by their graduating idiots who could no more pass professional exams for entry into a profession than they could fly to the moon.