Perhaps I am missing something, but it seems to me that one plausible approach for the Colts if Peyton's health is still doubtful would be to release him, but let him know we are still very interested in re-signing him as a free agent. Certainly it is possible that another team will out-bid us for his services, but I'm not so sure that would be the case. Consider:
(1) Early in the free agent season any team would be leery of paying a ton of money for a QB who may never play another down. If the Colts don't pay his bonus, there should be some major doubt about that. Some teams may decide to gamble on him, but I expect they will be far smaller offers than what he got last summer. And they will probably be heavy on incentives and salaries rather than guaranteed money. The Colts can probably afford to gamble a bit more on him simply because their fans will be more understanding of a last ditch attempt to extend the Manning era than other fans would be of acquiring him. We could also negotiate the new contract before formally releasing him from the old one.
(2) If he passes on the early offers and gets convincingly healthy this summer, then he can expect some pretty big offers. But again, he should be worth more to us than another team. A big part of what makes Peyton Manning so good is that he knows his receivers so well. Here, he'd be working with at least a few guys he already knows well. Anywhere else he'd be starting from scratch shortly before training camp.
(3) If Peyton takes an early offer and ends up not playing, I expect he'd really regret signing elsewhere. It'd just be a pitiful end to his career. Plus he'd tarnish his image both here and in the new city.
I realize one problem is that we are tight on cap space, and that the problem is ironically worsened by the need to take a big "dead cap" hit by declining the option on the contract that was supposed to ensure Peyton finished his career here. But I expect Peyton will end up signing somewhere for a contract that is fairly cap friendly for 2012. If he signs early, the contract should be heavy on incentives for the first year which I believe could be structured to count against the 2013 cap. If he signs late, then most of his 2012 pay would be a bonus which would be spread out across probably four years - and it would probably be significantly less than $28 million.