well, they are not ideal as they are freshwater and probably quite fatty but once in a while wont hurt... unless the fish has been treated with a copper based medication, in the LFS maybe? Then you're in bother, well your octo is...
It should be fine once in awhile if the octo can catch it. I'm guessing they don't want a sick fish to spread to the other baitfish, it sucks having a tank full of dead fish, I've had my share of that.
Well yes! The medication is put in with the fish and they absorb it through the gills and digestive tract. There wouldn't be much point in medicating a fish if it doesn't get into the fishes system!
If the fish was held in clean water for a time (I don't know for how long though!) the medication would flush out. But is it worth the risk for your octi? Plus as colin says the freshwater fish are typically very fatty......not good for your octi. Can you try to get some marine fish if your octi likes to eat fish?