So, how do you think I should handle the inevitable confrontation next week?

Demand that he tear the heads off that car. After they are off, see if there are any damaged piston crowns (which I would imagine there will be). If there are, tell him his actions are the direct cause of the problem. Take a camera with you, take pictures. If he doesn't like that idea, that means he has something to hide. Take your car back, and take him to court.

Based on what you have explained here, it is obvious that he knows he screwed up your engine. If he will fix it and make it right for the originally agreed upon $500, then let him fix it if you believe he is competent to find and install an engine. But that is a big chunk for him to eat. I would be surprised if he offers to do that, but if I were you, I wouldn't settle for anything less.
The problem here is that the car wasn't running when you took it in and there is no way for him to know the condition of the rest of the engine. For all he knows, you are trying to bamboozle him for a whole engine for the price of installing heads. You have to look at both sides.
I agree with sandrock that you should demand to see the damaged parts. You own them, they are your property. If I ever have someone else do work on my car, I keep the old parts and handle any core exchange myself.

I too, would LOVE to see the heads come off that car to inspect the pushrods, valves, and pistons. If there'* any damage to any of them, it'* his fault, and I bet there is, and that the crank did NOT spin a bearing. The sound you hear is the valvetrain beating itself to death.

I made a pushrod length change not too long ago. A very SLIGHT change, and it was a very risky and nervous time for me. This guy should never have done what he did with the pushrods under any circumstances for a repair.