The line from WIS a few years ago when this went into effect was that individuals were selecting low PA A+ armed catchers and using them as defensive replacements late in games and shutting down the running game late. So they priced catcher arm based on defensive usability and thus, the flat rate was born.

I agree with pricing as far as defensive usability to a point. In your Blanco example above, no one would ever use him for any reason except a late inning defensive replacement. He can't hit, so you wouldn't draft him as a PH. He can't run, so PR is out of the question. But he is VERY effective at effecting the game late since he can cut down on SB. Thus, he's more valuable than a position player with similar good defensive stats, way much more so than even an A+/A+ SS simply because he affects every opposing player who is on base.

That said, the pricing is skewed that they add a flat $1 million. I think the flat rate should be applied based on PAs. The numbers that follow provide an example below:
 

• 50-100 PAs = 250K flat rate (you're still going to get 80-100 games out of these guys if they are only used as defensive replacements, so they can affect 80-120 Innings in a season with their defense).
• 100-200 PAs = 500K flat rate (These guys can come in the 8th inning every game, so you're looking at double the usage of the lower group, say 160-240 innings in a season)
• 200-300 PAs = 750K flat rate (These guys can replace in the 7th inning every game and actually start games as well. You could easily get 162 games at 3 innings or even 70 games at 9 innings out of these guys.
• 300+ PAs = $1 million (These guys can start, platoon and still come in as defensive replacements most games...thus, the full rate would apply)

Again, my amounts are an example, but it seems to me that this would resolve the $/PA issue while still charging the amount of usefullness the A+ arm brings to the defensive side of the equation.

Aside from Gary Carter a few teams back, I stay away from the pure 'catchers' in the draft center and only go with A+ arm catchers who are listed at another position as their primary position because they're substantially cheaper.

I'll take a dissenting opinion all around here. 

(1) I see no reason why there is any reason to add a fixed amount to any player.  If an owner wants to burn a roster spot for a A+ arm, even if the player costs only $200K, that seems to be a fair trade-off for having one less pinch hitter or runner.  Prior to WIS adding this salary ajustment I never-- not even once-- hear/read a protest that it wasn't fair that their team's running game was spoiled by a scrub.

(2) There are a lot of other cheapo specialists that are often used and WIS never adjusted these salaries.  Wilson Delgado at $250K is a great pinch hitter but has almost no other use.  Ditto for Clyde Sukforth and Howie Clark at $200K each.  I often draft Tim Flannery and John Dodge as defensive replacements if I am short PA at 2B or 3B.  Besides strong-armed catchers there are no other flat adjustment to player salaries.  Again, I do not see why the adjustment is necessary.

(3) I think the concept of spead teams is a bit flawed.  Don't get me wrong: I am not a big fan of the home run in baseball and I think small ball is more exciting.  However I think it is wholey unrealistic to think that the best base stealers could have stolen even more bases than they did in real life against a bunch of great throwing catchers like (a young '75) Gary Carter.  I watched guys like Vince Coleman and Tim Raines play.  I know that in their best stolen base years (especially Coleman) they ran just about as oftern as they possibly could.  If WIS would dial back the utility of sb specialists like Coleman, the utility of great catchers would also be diminished and there would be no reason for a fixxed adjustment.