It's never a perfect system and it doesn't matter what is in life but people will try and often find a way to manipulate the system.
Beating someone at Districts and/or Sectionals in a thumping only means so much. Teams can look at certain lines, take a guess as to who may be playing and throw out the sacrificial lamb.
For most players in Denver getting bumped from 3.5 to 4.0 is typically a 2 year process. You have good results and that separates you from the pack of players you were in, likely in the midpoint of the range. Then you have to do it again....all while avoiding the bad loss.
Unfortunately the algo the USTA uses is essentially playing the match on paper. But it's all they have. There is no way to judge how one person's style will factor against another, if someone got into an argument at work or was up all night with their sick kid. Life gets in the way.
People who want to move up, play up. I see a lot of good local 3.5's here in CO who stayed at 3.5, even with good wins over those bumped to 4.0. Others just played up all year, went 2-10 and lost 2 and 2 most times...were bumped. Of course you can't "play down" unfortunately!