One flew over the cuckoos nest
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No I don't think it does. On the contrary, it confirms his sanity. The Chief knows that McMurphy would have wanted this. McMurphy was left a "vegetable" after his lobotomy. McMurphy thrived on his clever wit, Chief knew this was no life for him.
Actually he has become more and more sane throughout the novel. He begins to realize his capabilities; he realizes his size, his intelligent brain, his lack of need for the paranoia and the fog that have surrounded him through much of his life. While we as the readers do not agree with his choice to smother McMurphy, we understand a certain logic to it. He knows that McMurphy is forever a "vegetable" after the horrible, inhuman treatment he receives at the hands of the hospital. Knowing how lively and alive McMurphy had been when he came to the hospital an essentially sane man, he undoubtedly feels that McMurphy would not want to live this way for the rest of his life.