This is actually one of the most innovative ideas that anyone has come up with to take care of Alzheimer patients. It is not a lie told to the patients, it is simply easier for them to beleive that nothing in their lives has really changed much. Treating them with dignity helps them to live better lives.
I believe this is ethical simply for the fact that It may create a safe and welcoming environment for people who's minds are already slipping from them. My grandmother currently has a form of Alzheimers and though I would like for things to be as normal as they can for her I think it would be nice for her to have a community where she feels like everyone else does.
Many Alzheimer patients lose touch with reality and become very upset when anyone tries to alter their false view. Scientists do not fully understand the disease, how to prevent it, or the best way to treat those individuals suffering with it. Treatments are still experimental and done with love and compassion for patients.
They aren't really lying to them because if someone asks them they are told the truth.
BUT Alzheimer's is one thing that a person should be allowed to be extremely specific in their living will and have those specifications followed for the most part, so if a person wants staff to constantly try to bring them back to reality as much as possible they should be able to specify that and then this sort of arrangement would go against their living will.
A person should even be allowed to choose euthanasia and specify how bad it has to be before that is what they want and what ever they put in their living will should override what wishes they may have in a mentally incompetent state. If a person is mentally incompetent to choose euthanasia they are mentally incompetent to change their mind if their past, mentally competent self chose euthanasia for that circumstance.
I would never want to live like that regardless of how well I was cared for. I would want euthanasia once the disease became severe. If 'I' did decide otherwise once the disease had gotten severe then that wouldn't really be me, so I would want my wishes for myself made as my true self to be respected over any 'wishes' I may have in a condition of severe dementia.
So, we are going to just patronize the poor sick Alzheimer's patience. It's bad enough they are struggling with this debilitating disease. We don't need to stage a life for them. Their lives are good enough. What we should be doing is adding intense exercise and healthy food to their diet. This seems to slow the disease down.