How do I handle my mother-in-law picking at herself because of an imaginary waxy substance that only she can see?

This sounds like obsessive compulsive behavior. She may have OCD or she may be in a stage of dementia, but it seems to me that this resembles many picking behaviors which result in sores. This is a very real problem. Maybe you need to see a doctor who knows more about OCD and/or dementia to see if an anti-anxiety medication can help (or some other type of medication). Heart surgery (or any surgery) can push an elder over the edge into dementia. She does need some help.
Carol