The Reds could let Lohse go, sign a free agent pitcher to be a #3 and use Milton/EZ as the 4th/5th starters. However I think Lilly & Padilla & similar pitchers could be seriously overpaid this winter ( ie 3 years at $8-10 million a year ).
If the Reds use Lohse ( at $4-5 million for one year ) as their #3 starter it could have advantages:
1. there is no guarantee that any of the 2nd tier free agent pitchers mentioned as a potential #3 will be any better than Lohse
2. the Reds could use 2007 as a transition year and see if Bailey is ready and see which is the real EZ ( early 2006 version or late 2006 version )
3. at the end of 2007 Milton's contract is up and we will have money to spend on a better free agent pitcher for 2008+ . ie if we give someone like Ted Lilly $30 million over 3 years now we won't have money to spend ona real #1 next offseason