This is a big problem that I've seen with Dragon Age and with this forthcoming TOR MMORPG. They're porting features from games to other games that don't need them and where, in fact, those features are UNDESIRABLE due to the very nature of the game.
Dragon Age plays like a single-player MMORPG. The loot is based off the MMORPG principle that you need this complex tiers system. You're very restricted in the amount of cash you can pick up. Oh, yes, people do complain that the economy eventually ends up broken in single-player games, but no one REALLY wants to be UNABLE to buy the very coolest stuff for their character(s) at the end of the game. There's no strategy in the game, just tactics (you heal up almost instantly after a fight is over, so there's far less long-term resource juggling than in most single player games). And don't even get me started on the job-board style quests that make up at least 50% of the quests in the entire game.
Now they're proposing to make a MMORPG that they will try to force to play like a single-player game. I was leery of this idea when I first heard about it, long before they had made any mention of the precise mechanic by which they intended to provide this supposedly customizable experience. I could think of a few ways in which it might be implemented whereby it might work out okay.
This "Flash Points" business was not one of them, for PRECISELY the reasons you list. It is little more than a half-assed creativity-less method of trying to shoehorn single-player mechanics onto a game where they have no business going for the very good reason that they DON'T WORK.
A much better method I thought of that would capitalize superbly on the (potentially) spectacularly massive scale of the Star Wars setting would be to enable each and every player to have their own "starting area" (their planet of origin, or even something as small as their particular village/apartment complex/whatever) of origin which is affected by the in-game choices that they make. And those choices would be more along the lines of "which quest lines do you follow" rather than "how do you finish those quests".
That could potentially be a way for the Flash Points to work that you didn't consider, John. Instead of them being an RPG standard like "do you kill the guy", it would be more like "do you *accept* this quest to kill the guy?" then your "party" becomes a pickup group of the people who *did* choose to play the game in the same way you did. It's rather easy to write the resulting quest instance in such a way that it more-or-less comes out with the same result no matter what you do (game writers have been doing this forever, and Bioware in particular--look at how many "dialog options" in Mass Effect and Dragon Age lead to PRECISELY the same response from the NPC), yet you are still given choice over how your character proceeds.
Using an method like this would also provide you a way to go back and do "the same" content while still maintaining some kind of semi-coherent story. You wouldn't be going back and doing EXACTLY the SAME content over and over, it'd be a matter of accepting another similar quest "okay, you assassinated X--now do you want to assassinate Y?", with the added benefit that basically infinite numbers these sorts of fill-in-the-blank similar quests can be generated by the game itself, so if all you want to do is be an assassin, you can get "new" quests to assassinate "new" people FOREVER. Add in the occasional unique quest (you've done 6 standard assassination quests, now you get to do the Boss Assassination quest with some actual unique content attached--but you only do that particular one ONCE) and you're in business.
So I wouldn't say it's impossible, but the implementation of this idea makes a BIG, BIG difference.