Read Dharma Mittra's response:
Every student—and every situation—is different, and it can be challenging to find the right variation to help an individual move deeper into his or her practice. As with all students, it is important that you establish a trusting relationship gradually and over time, especially when a student is new to yoga and may lack knowledge and body awareness. Remember that yoga is not merely an exercise class but a spiritually connected relationship. The person in the teacher's role must nurture this unique relationship so that the student can open fully to the many lessons you have to offer, whether they are in the spiritual, physical, or mental realms.
Regarding to your specific question, I would say there is no need for a sudden change, especially with an older student who is happy with how she is practicing. However, you can direct her to safely use this modification, being very careful that she holds her wrists straight and tall, not allowing them to bend during the asana. Bending or collapsing the wrists may result in serious injury. As your student continues to practice, she will naturally gain strength and flexibility.
There are also many ways to improve the arthritic condition itself. I would suggest that she stay away from alcohol, yeast, and most animal products (dairy in moderation is fine). In my experience, this diet alone will dramatically reduce swelling and pain in the joints. Flaxseed oil can also be taken daily as a lubricant for the joints. She can take up to 1 teaspoon daily, by itself or mixed in juice or a fruit blend.
For further physical therapy, you could instruct her to manipulate the wrists frequently by rotating them in a circular motion and by using forward-to-back and side-to-side movements. She can also massage her wrists and hands daily with sesame oil and then wrap them in a heated blanket. Following this regimen, she will surely see an improvement in her condition and be able to practice free from pain and discomfort.