34 yr. old pony diabetes

Being in a dry lot with hay is not torture or anything.

Soak then rinse all hay that will help lower the sugars.
Don't ignore nutrition on his diet

Quality of life has to be at the top of the list in keeping an animal alive and only you can answer that question but both of these conditions can be relatively well controlled by meds and diet. Limiting his out time to mornings when sugars are lowest or when the grasses are dormant will reduce that exposure while still giving him some social time. I would give him a round of both meds. It will give you time to see how he does with the changes and give you time to grieve. Than you will know what the right choice is.