No, you don't understand the problem and it seems you have not understand what PAM is for and what not. PAM must use the defined protocol to get the password or to change it. If the protocol does not allow md5, PAM cannot ignore this and use md5. PAM can only use what is allowed. If the server on the other side is buggy and don't work with md5, PAM cannot fix this. PAM is for making applications simpler and configuration easier, not for replacing existing authentication schemes or protocols.
This is probably why I shouldn't answer technical email for breakfast. I'll claim low blood sugar led to the brainfart I had. Anyways, Most vendors have moved from crypt to something more secure quite a long time ago, and as Roman pointed out it looks likely that SuSE will to. I see absoulutely no argument for keeping crypt, as for backwards compatibility you can recompile your software if you absoulutely need to, but if it's that old you probably need to upgrade anyways.
Thorsten
-Kurt