Hospital patients fit to leave but in need of extra care, can face up to 100 days on a ward before a suitable care place is found, an audit shows.
Bed blocking can arise when a patient transfers care services
The report found, bed blocking cost £69m in 2006-07, £26m of which "could readily have been spent elsewhere".
The Wales Audit Office probe into Cardiff and the Vale, Gwent and Carmarthenshire found fewer people are blocking beds but for longer.
Health minister Edwina Hart said work was underway to improve the situation.
The overview report by the Auditor General of Wales Jeremy Colman found that problems arose when a patient transferred between health and social care services.
Despite being passed fit to leave, Joan Hughes from Barry waited a month to be discharged from hospital into a nursing home because of a dispute over funding with her local authority.
She said it was a "horrible feeling" because she did not know when or where she was going to be moved.
Her daughter Joanna Hill said her mother was becoming "institutionalised" while she waited in hospital.
"She didn't know what day of the week it was, she was unsure of what time of the day it was," said Ms Hill.
"Hospitals are supposed to be for people who are trying to get better but as soon as they are well they should be moved out."
According to Mr Colman, the system was failing to solve cases like Mrs Hughes's but her delay was shorter than the 81 day average for the Cardiff and the Vale NHS Trust area.
"Unnecessary delays are bad for patients who need to move on because they can lose mobility, mental and physical function and ultimately their independence," he said.
Such delays also harm those waiting to go into hospital, causing difficulties for wider service delivery and performance across the system, he added.
David Collins, a cancer patient from Barry who needs three operations, said the first scheduled operation has been cancelled four times.
He said: "I am extremely worried for obvious reasons, extremely angry and with this disease we could do without this situation."
Although the report found good practices which could ease bed blocking, it also found weaknesses and said the current systems underestimated the extent of the bed blocking problem.
The report has called on the assembly government to say how long it is reasonable for a vulnerable elderly person to remain in a hospital bed awaiting the placement of their choice.
The heath minister said more work was needed to lessen bed blocking in Wales and urged NHS Trusts, Local Health Boards and local authorities to take on board its recommendations.
"It highlights numerous examples of good practice that I want replicated across Wales," she said.
"This report will feed into the action plan that is being prepared to reduce this problem."
The auditor's findings will inform an independent review of bed blocking across Wales which was commissioned by the assembly government in 2006.
A spokesman from the Welsh NHS Confederation said efforts needed to be "redoubled" to prevent unnecessary admissions to hospital and to support older people to be able to live independently.