It is a tricky situation.
Imho,
On one hand keeping the baby away from the drugs/smoke/paraphenalia/intoxicated person is a black and white decision/policy...
But on the other hand, people are involved and I just personally feel that people deserve to be respected, (exceptions, true: those that have used up the respect like abusers).
Clemetteattlee makes an essential point, in that sil is ill. And prison, yikes. The girl has some serious issues, but is in treatment, serving/served her time: trying to sever the grips of the devestatingly impossible drugs. She should have some compassion from family-it is the only compassion she is ever likely to get.
I would hope that you could let your dh lead the way in how he wants to deal with his family (of origin). It is not like he is expecting you to be her bff, after all.
All you need to do, again imho, is to never leave your baby unattended-rather what you'd do normally anyway, right? You and your dh (and his folks too) will be on guard against all the negative 'what ifs' that could possibly happen. Have dh insist his parents search the home, to 'baby proof' it-to ensure without a doubt that anything to do with the drugs will not be accidentally found (by anyone).
I also agree with Alarkaspree, and would suggest anyway, as another gesture of kindness to the difficult family circumstance (which lets hope is temporary), to go for a visit, but stay in a hotel. This will help sil (and Op for that matter) stay in a more stable mental environment without the 24/7 comparisons that will inevitably be made between the siblings' life choices. It might be a reality that his parents can not leave sil home alone.
Please consider to try it once, with a sincere open mind. The hotel will provide an escape if things do not go well.
I feel that your dh's points are valid. Trust your dh, respect his parenting; he wants his baby to stay safe too.