Sorry to hear that he is sick and has to go through this. He, and your family, will be in my prayers.
As for the quilt, the kids handprint would be cute, kind of like hugs. You could use the paper to stitch the names either with machine or transfer to stitch by hand. Each child could draw a picture of something fun they did with Grandpa, or if they have a special picture, that could be transferred to photo paper. I am sure the quilt will be greatly appreciated, no matter what you do.