The communication is all digital. Having lower bars doesn't mean you immediately sense degradation in the quality. Eventually it will start "dropping bits" and lagging and crackling. There is a video showing complete call drop when held with the skin connecting the antennas.

Regarding the possible signal meter software bug, think of it this way - the device can't sense when it's being touched, and obviously some effect is triggering the change in bars. There is no explanation other than a change in reception/transmission. Maybe there's a bug that exaggerates the loss of reception, but something is definitely happening. Also, lower reception means higher transmission power, means less battery life and more warming up your head. It can't be good.