I believe Apple will recognize this as a bug (I submitted one today). I did notice that new entries in /etc/hosts/etc/hosts are picked up but, changes to existing entries are ignored. So.... changing an entries' hostname (e.g. web1 to web1a) provided a workaround for me.
OLD /etc/hosts entry
: 54.173.164.18 web1
NEW /etc/hosts entry
: 54.174.161.12 web1a