I remember a nearly identical thread popping up not so long ago. My arguments against such a system last time were:
1) Unlike other countries, the US government does not heavily fund higher education - which means that individual institutions would be responsible for picking up the costs of training additional students. This would mean, hiring additional faculty members, renovating or building entirely new campuses to house students, and budgeting far more for the school's malpractice fund. Also, if such a switch were to happen, it is doubtful that alumni of the school would approve of it, and I doubt donations would be very substantial.
2) The small group components of medical school would suffer greatly, and many would probably be eliminated. Anatomy groups would either balloon in size, or additional bodies would be needed. For some states with multiple medical schools, this increase in need may be impossible to meet. Furthermore, anatomy lab requires resources (people preparing the bodies, physicians volunteering their time to help assist students, fourth year students to prosect, etc), and those resources aren't easy to come by.
Also, the recent trend towards PBL or small group learning would all but be eliminated (I know, some of you would be very happy about this, but still). There just isn't the manpower to have facilitators for so many small groups, not even for those designed to teach clinical skills. I don't know about you, but I don't think medical education would be the same without the ability to practice things like suturing, taking abuse histories, or performing eye/ear/etc exams in small groups.
Many electives and shadowing programs for students would go down the tubes because demand would exceed what the university could supply. Advising would be sub par, and the institutions would be so overwhelmed by the sheer number of students that it would probably take an eternity for student support offices to even fix simple problems. And just forget about early clinical exposure - a system like this one just wouldn't allow for it.
3) There would be many problems associated with clinical training if enough students didn't fail out of the system prior to third year. Exactly who is supposed to supervise these students? And are they really going to learn much if they are forced to travel around in large groups that limit how much each student can actually do or learn?
4) It would severely impact the student body if students were allowed to come to school, make friends, and then watch those friends fail out. Depression can already be a part of medical education, and this system would only add to that. Need for counseling would go through the roof, especially since american students aren't used to losing classmates, and guess what? Once again, the funds wouldn't be available.