So it sounds like they should be put in a facility optimized towards containment and letting them live out their days in some semblance of peace. (Not wanting them in peace sounds alot like you want them punished) Not in a facility where they take a slot to learn a trade from someone else and get to influence people who reform is deemed appropriate.
I thought your point was that the concept of prison as "a place where you are removed from society" is fundamentally flawed, and your rationale was that removal does not serve the person removed. It seems that your point is actually that the modern concept of prison as "a place where you go to be punished" is flawed, which I agree with. Prisoners should simply be outside society, not in pain or fear. If they can manage to live peacefully that ought to be allowed; if they cannot, they ought to be restricted further.
I think there are only two real "punishments", which are death and exile. Corporal punishment is just partially-applied death, and prison is just partially-applied exile. All other punishments I'm aware of are just shades of either death or exile; even monetary fines are "a reduction of your ability to participate in society".
I'll give you an example to pair with your drug dealer example. A small community store is run by an old couple. Everyone who enters is greeted with pleasure. Shoplifting increases, and the old couple sells to a young person, who is concerned about shoplifting and doesn't greet everyone with pleasure. Then there's an armed robbery. Now there's cameras, bulletproof glass, and the store clerks are openly suspicious of people who come into the store. Now society is worse to live in, and the only people who caused that are the ones who did the crimes.
Crime causes poverty of spirit and weakens social bonds; prison is a place to keep prisoners so they don't disintegrate society.