Papelbon has emphasized that he wants top dollar, and the Sox usually want top value. These are the possible scenarios I would predict.
If Papelbon has a Rivera year, he's back with the Sox on a big contract, unless maybe the Yankees want an elite reliever for the 7th inning.
If Papelbon has a decent 2011, he will get a 3 year deal because of his past performance, and I don't see the Sox taking that risk with Bard as a cheap and viable replacement. They also know a lot more about his health problems than other teams might.
If Papelbon has a crummy 2011, the Sox will have already overpaid for him in 2011, and won't offer him arbitration. He'll want to close, and the Sox won't let him blow another ten saves in 2012. He'll be best suited to try to have a recovery year somewhere like Washington or Pittsburgh to re-build his value outside of the AL East.