Basically this is just what jquery ui reports as drop index when using helper elements. It looks like it counts the hidden elements that appear to be co-dragged inside the generated helper element. The multiselect directive tracks the positions of the co-dragged elements to move the models appropriately based on their original positions and the reported drop index.
Jquery ui might also report different dropindexes if you decide to start the drag from a different element.
The part that update is not firing needs investigation