You should not have written her off. As a medical fact stuff like that happens all the time. We call it schizophrenia.
But really, we can consider a state of mind like that of the truly psychotic, or those in 'psychotomimetic' states like those induced by dreaming or drugs like LSD and DMT (which theoretically induces the same neurochemistry as dreaming) or close relatives like psilocybin at high dosed, as dreams, and within them there can occur other dreams.
Real afficionados of pure DMT (as distinct from ayahuasca) in particular easily become convinced all dreams are equally valid, and that the creatures they interact with in the induced dreams are in some sense as real as those of waking life -- See Terrence McKenna on the subject. There are collections of such creatures: "See Urchins" (sic, it is a pun) and "Machine Elves" in particular, that occur to different people in the same state and are occasionally helpful to individuals, or seem concerned or excited about human progress.
Taking that DMT immersion as a model for dreaming, you can fall asleep on the drug, and enter a state sometimes called 'slipping' (again pun, "sleep tripping") where you dream almost continually, and don't get much sleep at other levels of brain activity. Dreams recounted from such a state often involve false wakings, and other tropes that mimic the idea of dreams within dreams.
The psychedelic community, therefore, talks a lot about these things, but not in a deeply philosophical way. You might still get interesting insights about layered hallucinations from the more experimentally inclined psychedelic writers like Rick Strassmann and Terrence McKenna, as noted above.