Wow! This is big stuff, and my heart goes out to you. It's so hard to comment on someone else's life, even when it's a good friend, and I don't know you...so I didn't click a poll choice.
Are there any support groups in your area or nationally that might be able to point you to resources for you and your son? There may be groups for kids to talk about their feelings, or play therapy that may help.
I don't know enough about your husband and your family to presume to say if visits should continue, but if he really has been a good dad I would be reluctant to make a snap decision. Definitely the hospital explanation will have to go. I like the idea of an 'extended time-out' for grown-ups. It would give your son something concrete to try to understand. I think part of the problem with the hospital explanation is that it's so vague - it may be its vagueness is especially scary in fact. If he gets a cold, will he go to a hospital for an indefinite time like daddy, for example? Explaining that there are special rules for how we treat other people called laws, and that when we break a law by hurting someone else/stealing/etc grownups need to go away to think about what they have done may make it less scary. Right now, it is probably just all about inexplicable loss for him, so maybe that would help.
Can you go to the jail on your own to talk to your son's dad about the problems your child together has been experiencing, and work out a way to deal with it together? If you both speak about it the same way, it may help. Your son probably needs to know that his dad did not leave him on purpose and that he is there because he made a mistake, and is sorry.
Keep in mind that even if you hit on the right explanation and work together with your son's dad on this, you'll have to repeat it and reassure your son lots and lots - even when you think he 'gets' it, he'll still come back to the same issues over and over. Just stay consistent and reassuring.
Oh, and also, do reassure him that mommy isn't going anywhere! You can explain that daddy's problems are because of daddy's behaviour. It's very sad that daddy has had these problems with his behaviour, but mommy does not have the same problems and will always be there. I can see that being a big fear!