It could be a reaction to some of his medications. Is he on pain meds? Other than the HE, that's the only thing that immediately comes to mind.
In Pt. 2 of your question, people having hallucinations are sometimes able to do physical things they might not otherwise be able to do...or think they can. So continue to keep close watch on him. Is he still in the hospital? If so, they should be using fall precautions, such as keeping the railings up on his bed. Some places have a monitor attached to the patient that will go off if they get out of bed.
Could it be a reaction to one of the meds he's taking? I've never heard of someone hallucinating from being in the hospital a long time. I had a 7-week stay once and was angry about it, then depressed, but hallucinations? No.
I don't think a mild tranquilizer could hurt at this point, though.
Well, I don't see anything there that would cause hallucinations. It's possible if he is malnourished and dehydrated that he could be hallucinatory. Commercials of guys in the desert, dying of thirst and hallucinating come to mind.
Shelly, if you're lurking...any ideas on this?