The students in my classroom are well aware of who is 'smart' and who is one of the 'struggling' students - and this causes separation among groups. The students are blocked into 5-6 different reading groups, ranging from below first grade reading level, to middle to end of fourth grade reading levels (mind you this is a second grade classroom). Therefor, the students read their books aloud in their groups, but the discussions end within their reading circle. Perhaps the teacher could extend the discussion by asking students to briefly explain to their classmates what book they are reading and a brief synopysis of the plot. Then, the teacher could facilitate discussion by asking the students how the plot of the discussed book is the same/different than the book the students are reading in their own groups.
In assessing student's literacy development, educators need to keep in mind the age of the students. For instance, I do not believe that a child's writing is the best way to analyze their literacy development. This is for several reasons; (and maybe I feel this way because I am also looking through the lens of a special educator) but what if the student has motor skill delay and is unable to compose sentences with legible handwriting? Perhaps you have a student who is dyslexic, or (like me) a student who is not the best speller... Does that mean that the student is lacking in their overall ideas and sense of story? No! I do understand and value the ability to use puncuation correctly, and the ability to write an 'appropriate title,' but these examples are only a small portion of being able to view a student's literacy development.
Now, I'm not agreeing with the 'wait-to-fail' model of intervention - however, I do understand and appreciate that all students mature at different stages with their learning. As long as a teacher keeps a 'good' running record of the students progress (and areas of improvement) and checks in with the student through conferencing - I feel that students shouldn't feel as pressured to 'keep up' with the grade level. (Again, I'm not advocating that students be permitted to 'fall behind' but I think we DO need to alleviate of the pressure off of them to keep up with a given standard).
Literacy encompasess several areas and ideas ranging from fluency to the ability to use technology in our evolving society. Therefore, I think we, as educators, also need to appreciate and celebrate the areas in which a student excells in a given subject area.