He's been starting to gravitate more and more to neighbors who use drugs/alcohol. They are not very good people. I have advised him this is not a good idea and I swear he's again being an oppositionall defiant teenager on the issue. HE tells me I cannot pick his friends. He's set up with he VA, he could go to groups there. Nope. He wont' even do his old hobbies. He sits and then wanders over there. I have to keep making up excuses to get him back to our home. I get he may feel lonely. But this is a magor perosnality change on his part. He was always against drugs. He won't follow reason/rational.
This may not sound ethical but can you use your dad's paranoia against him? Get him to be paranoid about these neighbors? I realize that it sounds like some kind of evil plan and it would be messing with his mind but after these people steal your dad's identity you might wish you had tried some drastic measures.
Can you approach these people and tell them that your dad has dementia and that you need to keep a closer eye on him and would they please not invite your dad in the next time he comes over? They can come up with some kind excuse like so-and-so isn't feeling well or they're getting ready to go out. Bring these neighbors around to your side. But if they're not honest and see this as an opportunity to exploit your dad they won't want to help you out which I would look upon as a huge red flag.
If none of your efforts pay off all you can do is just try to minimize any damage that may occur. Make sure your dad doesn't take his wallet with him when he goes over there. Keep an eye on his bank account (if you have POA). Request a credit report on him (again, if you have POA).
Maybe the neighbors are harmless. That's a possibility too. Just because they drink and do drugs doesn't mean they're out to hurt your dad but if there are people coming and going all the time chances are there will be some shady characters around at some point.
Now I'm showing my evil side but can you threaten your dad with assisted living if he continues to see these people? Tell him that if he continues to maintain a friendship with these people, who you think are not good people, he's going to have to move out for his own good. People say "pick your battles"? This is a battle I'd pick.
And if you're noticing changes in your dad and now he's hanging out with these people I would suspect dementia, in which case your dad may have trouble managing his own affairs and making rational and prudent decisions. Hanging out with troublemakers would not be a good decision on his part. Plus, your dad may be very vulnerable if he's in the early stages of dementia and people who abuse alcohol/drugs are not always the most honest of people. Not everyone who uses is dishonest but you're dad is in a vulnerable position.
But it's not like you can hog-tie him or keep him chained to the house. You can't physically remove him from the neighbor's house either. Try talking to your dad in a friendly manner (concern or accusatory will just put him on the defensive). Find out what it is about these people that he likes. There's a reason he enjoys going over there. Find out what that reason is. Keep the conversation about him, not about the neighbors drug/alcohol use. What do they do over there? Does the host put out food? What type of work do the neighbors do? Etc. Maybe you can get a better picture of what is so attractive to your dad.