Ok. She is a nut. Wow. I can't believe she insists the healthy child goes home as well. Actually, my H would do something like that, but that is crazy. Makes no sense? Especially if the one child needs attention, wouldn't you want to focus on the sick one, and let the healthy one play and be happy at school?? Geesh. She is totally throwing OM stuff in your face. I would never put those shirts on your kids. In fact, I would stain the heck out of them so they can't wear 'em. That's just evil me.
You are doing everything right, she is just lost and lashing out. I guess when she brings up OM (for example, the shirts), don't even acknowledge her answer and compliment your daughters on something else or change the subject. Sorry about the smoking. H finds tatoos and belly rings unattractive, funny OW has both. Go figure.