She thinks they are in school. She gets very anxious when they don’t come home. We explain they are older and have their own kids and she couldn’t possibly have kids that are 7 yrs. old. She then wants us to report them missing or else she wants us to go out looking for them. We would lie and say they are staying by someone’s house and then she wants to know who and when they’ll be home. When she leaves the house we have to get home because the kids will be getting home from school and no one is there. This goes on most days in afternoon and evenings.
Try adding a distraction to a therapeutic fib, i.e., they'e at Jeanne's for the night, how about some ice cream?
Talk to her doctor about meds for this.
My dad doesn't need to take any medication for his false reality and maybe that's because his caregivers usually know how to agree, distract and fib. I'm glad for this because most medications have potential for too many bad side effects.
Go with the flow. "The twins are at sleep-over camp with their school class." If you can remember something they did at that age that kept them away overnight, use that. "While you were in the bathroom Mrs. Smith called. The twins and the youngest Jones girl are there and they are going out for pizza." Then offer a treat or ask her help with something or otherwise distract her from that topic.
Don't try t convince her her kids are adults now. That does match her reality and will only frustrate both of you.
While she is such a nurturing frame of mind, I wonder if she would enjoy a realistic baby doll. They make them about the weight and size of an infant. My mother wasn't much into cuddling hers, but she did enjoy seeing it dressed in various costumes. (A doll intended to fit into the arms of 7-year-old isn't the same. You may not be able to readily find one locally, but you can find them online, for about $100.) I'm not suggesting that you tell her this is one of her babies. Just that this is a cute doll you thought she might enjoy. Let her take it from there.