It does that. But because water boils at 212F, the smoke chamber temps don't rise far above that - particularly if you use that water pan as a baffle. My smoker runs a steady 225 with the water pan. So you have to keep that in mind depending on what you're cooking and how much time you want to spend.
It does help keep the outside of your meat from drying out. And indeed you can use it to add flavor! But you only need a splash of flavoring as indeed, it's gonna be subtle no matter what. A half-bottle of beer, or perhaps some vinegar or even a shot of bourbon....
My baffle/waterpan is now a fullsize restaurant baking sheet, 18"x26"x1". I've hammered the center of the pan inward, and poked a couple holes in it. I put it roughly 1" away from the firebox, and it's raised above the firebox opening.So a bit of heat/smoke goes straight into the cooking chamber, but most hits the pan before being dispersed. And because of the raised holes in the center, it is dispersed quite evenly. The water around the sides of the pan keeps temps stable all around.