Instead of the "sed" in the original question, I have written a simpler one with echo to illustrate the idea: Instead of looping through the whitespace separated items:

• First we get the word count after "," substitution to determine the number of iterations

• Convert the whitespaced string to an array with "()"

• Iterate through counts

• Make " or" part an output of a conditional and into a variable

• Subset the array with iteration

• And echo/sed, etc

    #!/bin/bash
  
    H="host1,host2,host3"
    H2=${H//,/ }
    N=`echo $H2 | wc -w`
    H3=($H2)
  
    for i in $(seq 1 1 $N)
    do
        if [ "$i" -eq "$N" ]; then OR=""; else OR=" or"; fi
        ITEM=${H3[$i-1]}
        echo "$ITEM$OR"
    done
  

Instead of the "sed" in the original question, I have written a simpler one with echo to illustrate the idea: Instead of looping through the whitespace separated items:

• First we get the word count after "," substitution to determine the number of iterations

• Convert the whitespaced string to an array with "()"

• Iterate through counts

• Make " or" part an output of a conditional and into a variable

• Subset the array with iteration

• And echo/sed, etc

    #!/bin/bash
  
    H="host1,host2,host3"
    H2=${H//,/ }
    N=`echo $H2 | wc -w`
    H3=($H2)
  
    for ((i = 1; i <= $N; i++))
    do
        if [ "$i" -eq "$N" ]; then OR=""; else OR=" or"; fi
        ITEM=${H3[$i-1]}
        echo "$ITEM$OR"
    done