Just look at the very page you linked to. It's a totally confusing concept that befuddles users and causes questions "we often receive", starts "panic", can "unfortunately" not easily be analyzed and you might need to "kill threads" and initiate "rollbacks" to fix the problems it brings.
I hade the same suspicion. Especially since the provider indeed runs a nightly backup of the VMs. But even after turning that off, the VM stalled the next night again.
A flag with that name exists, yes. But it does not seperate table data into one file per table. It will still put stuff related to the tables into the central ibdata1 file.
Google "ibdata1 one file per table" to see all the pain it causes.
Again, check the very link you posted. People do that. Until shit hits the fan. And then they have to take that black box apart. Which is not easy.