I just googled up recessed flourescent fixtures in the 12"x12" size. Try a commercial electrical company rather than the usual retail lighting store. Sure a lot easier than patching and rewiring.

does that 1000$ included mudding, taping, priming and painting and or ceiling texture? If so, then I would pay 1000$ to get that done. It seems reasonable. 8 lights for 500$, also does this include the lights themselves or just the labour and wiring? To do this yourself, depending on your experience could be quite time consuming and could be a major inconvenience, especially in the last two months of your pregnancy. all told 1500$ for all material and labour is not bad.

I have had contractros tell me different ways to replace 2 ft sq florescent lights with 6 inch recess, and each seems to say his is the only way Option 1 - after taking out old lights, frame and drywall, and then put in recess by cutting holes Option 2. put in recess in holes left after old removed (by attaching to joist or something) and then put in cut drywall Option 3. One site said make 2 ft patch, put in lights and then install patch. is one better?

I only see three cables in that box, so I'm a bit confused about the reference to four. Anything is possible. You really should have investigated this before removing the switches. As it is you'll have to trace out things rather than making assumptions. I do note a couple of issues (other than the crappy drywall work). The box looks to be set too far back to be legal. The box needs to not be set back within a 1/4" of the finished surface. Another clue is the presence of black tape on the white wire leads me to believe that this may be a switch loop (or some other circuit buggery) and not a feed from the panel or a direct line to the light or heater. Again, you'll need to check the wiring at the light/heater end. The cable clamp for the left side/bottom cables appears to be missing (you need to put it back when you are done). Further, if this circuit serves other rooms, you may NOT put a bathroom receptacle on it. A further note, remember all bathroom 120V 15/20A receptacles require ground fault protection.