Hi Woobly:
I'm just a Mum, but this is my theory on reading in Class R based on my two girls at a school which doesn't get a lot right, but does get good results with their highly structured reading programme:
I'm not sure what your level 1 - level 3 books relate to - because we used colours - but I'm going to assume that the colours tie up to the numbered bands on reading chest www.readingchest.co.uk/book-bands.
Reading is a thorny issue for many reasons - but partly because it's one of the first and most obvious ways parents can use to distinguish able children. Not all schools, of course, but in some schools what level book your child is reading at becomes something of a competition. I know that DD1 was a slow starter with reading, and it affected everyone's attitude to her abilities, including my own.
Meanwhile the teacher is teaching 30 or so separate individuals with different strengths, weaknesses and abilities reading. Some may be good at sounding out but not blending. Others have memorised words and have great decoding skills so can guess a lot by looking at pictures and recognising patterns. There was one girl (youngest of 3) who basically could read in Class R - she was around reading practice at their home so much.
Beyond this there will be children that have not attempted any reading out loud whatsoever to this point. Are they behind? Well not really - especially if they're newly 4, but for whatever reasons they're still read to and haven't yet started to read themselves. There also are children that simply prefer to be read to (my DD1 comes to mind - she prefers to listen to a story given the choice, she hates reading out loud - she struggles to prounounce 'r' and is increasingly embarrassed by it).
I can't say this is every school - but you can understand the advantage in expending energy on getting the vast majority of pupils in Class R to a fairly similar standard. It can be very frustrating as a parent, you want your child to progress, but it may well be a case of the needs of the many outweigh the needs of the few.
As part of many reading programmes, phonetic sounds in English (there are ~ 42) often are taught in order - e.g. jolly phonics approach here jollylearning.co.uk/overview-about-jolly-phonics/ - and often this is accompanied by writing work, songs and reading books that target that week's sound(s). This structured approach can meen that reading books don't seem to be making a lot of progress, but could well be making a lot of 'decoding' skills progress (pennies in the bank for Year 1 for the entire group).
As many have suggested talk to the teacher - but bear in mind that your child may be the child who is streets ahead of the others and the teacher may feel it better to teach to the abilities of the other 29. You may feel this is simply repeating information your child has already acquired - but the phonics systems have worksheets for writing skills, songs to learn subtle changes in sounds and the system feeds into further word skills (especially spelling and some grammar rules - understanding short and long vowel sounds, so understanding why you double letters when you add -ed or -ing to stop). I suppose a good way of thinking about it is if your child presently can't write the words she's reading, than it is worth working systematically (which can mean slowly) through the phonetics programme.
However, as learnandsay & many others on other feeds have said, there is nothing to stop you progressing her reading out loud skills at home. However, it may be worthwhile asking the teacher outright if there are other aspects of reading (prediction - what happens next, discussion of structure: beginning, middle and end of story/ sometimes called story mountains, terminology: author, illustrator, character, narrator, etc...) at home.
HTH