Swampy's got personal experience with something like this -- his mother went through a period of hallucinating a few years ago. She completely recovered, so it is possible ... depending on the cause, which isn't very easy to spot.
One thing that Swampy found interesting was that his mother both saw reality and unreality superimposed. I would walk in the room and she would say "hi, good to see you! .... do you see daisies growing on the floor over there?" .. and Swampy would say, "no Mom, no daisies"...
However, she did not lose any of her memory, all hallucinations were new. So when we would ask about events in history, she could immediately answer with the correct date. So underneath all the unreality was a mind that completely worked.
Swampy found that his mother hallucinated based upon her emotional state. When she was frightened, she would typically see family members getting murdered in front of her -- a manifestation of a worst fear. Later, when she felt more relaxed, she would hallucinate things that were good to her, such as flowers, or mice (Swampy's mother loves little creatures that run around).
I mention this because it may help you to think about what the hallucinations really are, are they misperceptions of real events, are they totally fictional? Do they correspond to mood, or stress?
A neurologist who has experience with these things might be able to find a drug that will help your grandmother. Its important that you not give up, as recovery from these things takes time.
The very first thing to check on when experiencing halucinations are blood sugar levels. Abnormal blood sugar levels can produce incredible halucinations, which are sometimes called "sugar people". These often appear in a half-awake, half-asleep state. People experience long departed friends coming into the room and the experiences are quite tactile and genuine.
Often mild blood sugar disturbances can be rectified by a supplemet of Chromium GTF (Glucose Tolerance Factor) and, surprisingly, a teaspoon of fresh cinamin with the breakfast. "Sugar People" exsperienes are often percieved as "out of body" experiences. They have been traditional aspects of religion, the state often being attained by fasting in isolation. There are other possibilities, of course, but this is the most common.