Agree with Kevin, the goal must be to get your own place. Not too close so the mother-in-law and your wife are still living in each others pockets, but not so far that she can't visit her mother once or twice a week.
It sounds to me that your mother-in-law is scared of being on her own with a drunk husband without the support of you and your wife. Which is why she is playing these health games. You must be selfish and strong and put your marriage and your wife's and and especially your daughter's well being first. A drunk, foul mouthed Grandad is not a good role model for your daughter to copy.
If your wife is reluctant to leave, then explain to her that this is not the right conditions to bring up your daughter and that she already has bad habits with words and also if her mother needs help you are still close by and only a phone call away.
If your wife is not convinced then take your wife and daughter on a family holiday for a few days, so she can see that your mother-in-law can survive without you being there and also how much better your lives and relationship is without the constant strain of your father-in-law's problems.
When you have got your own house, just make sure if the mother-in-law stays for a few days, that she always sleeps on the sofa, so she understands it is temporary, other wise the stay may become permanent.

You will find once you and your family have moved out, the relationship between your mother-in-law and your wife will change for the better as it will be much more on the basis of friends and equals.
I hope this is of help and good luck in getting your own place and resolving your family problems.