Such matchmaking systems work in PvP games. Ranks and ratings are a thing for a decade. The World of Warships ranking system is pretty much perfect, not only in terms of challenge but in terms of matchmaking time. PvE matchmaking would be even easier.
However it would defeat the purpose of the random matchmaking in dungeons. We already had a good-enough matchmaking system before them, called “guilds”. The purpose of random teams is to carry morons and slackers. Experienced teammates are purposefully lured into this cesspit by rewards (legendary drops from LFR?!) to carry the rest.
The reason is that the morons and slackers want rewards, want progress, but don’t want to get better. They want to get carried. They are the reason for toxicity in PvE groups. Please note that I didn’t say “source”. Hate can easily come from a rightfully frustrated good player who is responding to the situation in a wrongful way. The below-hunterpet “teammate” didn’t particularly asked for his boosting. He just queued up. Hell, he might even hate the situation and prefer to be with peers. But even if he is a slacker wanting a ride, not like he selected an “I want a ride” option somewhere.
Game developers do this because the alternative would be losing the morons and slackers who can neither live without rewards (like the casuals) nor have the brains or patience to earn them.
I think a niche game could focus on this. Advertise itself with its sophisticated PvE rating system and automatic matchmaking based on rating. Hell, it doesn’t even have to be sophisticated to work perfectly, they could just use tiers and stars like World of Warships. I and Tobold would play it instantly with love. But it would be a 100K subscriber game and not a WoW-killer and no one finances those.