There is nothing seriously wrong with Jonathan Papelbon.
It's a common career trajectory for any star player and especially relievers. A couple years of brilliance followed by many years of very-good. I fully expect Paps to put his bad outing behind him and be a solidly effective closer for the rest of the year.
Also, I bristle at "better" when comparing a middle reliever/setup man with a closing reliever, it really isn't apples-to-apples. The closer is the guy who gets the brunt of the advanced scouting from opposing team, you need to be a lot better than the middle reliever just to do as well as the middle reliever. Besides, you have your own concerns about Bard's usage and I echo them, and as well, the difference in performance between Bard and Paps is exactly two bad innings so it's not exactly heaven-and-hell here.
And I have no problem paying Papelbon if that's the best way to maintain maximim relief depth in the bullpen, even if that means that Bard isn't closing. As long as Papelbon is a good closer it doesn't bother me too much that there's a better reliever in the pen, that just means that we have a decent pen.