If it's really been that long, it will just end up being returned to you. It's strange that she wouldn't collect it - I would usually say she's just been busy but given that in about a week or so it'll be returned to you, it's their problem.
If it does end up returned to you, just refund them and add a message to the refund, and on Etsy, to let them know that after several attempts to contact them both by yourself and the post office, the item's been returned to you, and the buyer's been refunded. If they still want the item then they will just have to go through the process of purchasing it on Etsy again.
I'm not entirely sure that I'd offer them a discount in this state - free shipping or something - since it wasn't anything to do with you, it's through their own negligence that it was returned.
And if the worst has happened and she's in hospital, I wouldn't think that running to the post office would be something she would worry about, and neither is the item being returned to you and her refunded.
Wait until it winds up on your doorstep.