To add to what Jom's saying about the problems of a fully badge system, you'll find a lot more badge farming going on. Without random loot or at least something that drops off only a given boss (or even a given group of bosses), I can easily see raids looking for the new Kara of LK even more. What could happen is that you only run a new raid to clear it. Even in the proposed tiered badge gear, once you unlock the new badge gear, you grab it, clear the new instance a few times to say you did it, then go back to farming badge gear again until the next unlock. You'd have to tie the unlocks to the number of clears of a prior instance (with a hard time set for the low pop servers). That would be the only way to assure raids would keep going back to the tougher stuff rather than raid the new Kara every week.
Chul brings up an interesting suggestion; tying more things to rep. A boss token system with a reputation system means you'll have plenty of drops going around on the first few runs where you're downing bosses. Meanwhile, you'll have a strong incentive to keep raiding until you're exalted.
RNG items should still be there. But these should be similar to the rep items, rather desirable. You wouldn't want a legendary on the boss token table
This would also help keep people running an instance. There will probably always be the Moroe's Pocketwatch and DST of WotLK (though we had Gruul drop DST two weeks in a row, random luck).