My Theory
My interpretation of the theory is that Tommy Westphall is responsible for only the direct crossovers in and to St Elsewhere. The characters come from people he knows and meets in his real life, and he takes inspiration from stories and lives around him, and possibly fictional media within his universe. The rest of the universe connects in a less clear way. I believe that Tommy Westphall is a glitch in what I call the "Tommy Westphall Multiverse". He comes from a timeline different to the one shown in the final episode of St Elsewhere, and glitched into the St Elsewhere "finale-verse" ( I am yet to figure out the reason...) . His daydreams are in fact not made up, but are him seeing into an alternate timeline from his multiverse (likely the one he came from).
The rest of the medias connecting to the tommy-verse come from a break in the multiverse due to Tommy's glitch. His daydreams started off as simply him seeing into his original universe, but as he grew older he began to gain control of his "daydreams" . He started to make things up, create backstory, add in characters from his own imagination, he manipulated the daydreams and they twisted from a basic view of an existing universe, and he began to create his own.
Tommy Westphall is incredibly powerful, and his mind manipulates the multiverse. He pushes timelines over each other & pulls new ones out of thin air. In doing this he creates what we know as The Tommy Westphall Universe. Each crossover is a bleed between two universes, and they don't typically remain one universe, rather they, well, crossover and continue on in their usual timeline. Tommy creates all of it, and controls how each timeline overlaps, even though he is unaware.