If you're using DirectX 11-grade graphics cards, doing the LOD tessellation in the Hull/Domain shader stages is fairly neat, and avoids some of the difficulties of having to patch up T-junctions between LOD levels. I've played around with it both this way, and more the way you are describing:
Not the greatest screenshot, but this is from my hardware-tessellated version. I'm sure that I'm not doing things in the most optimal way, but on the hardware I was using(GTX560), the hardware-tessellated version was considerably faster.
Yes, hardware tessellation is something i need to investigate more. I have toyed a bit with a terrain tessellation demo that was published in GPU Pro 4 and it looked very neat indeed. The performace were very good on my development machine (GTX 780 Ti x2). When i tried it on a smaller card (Quadro 600) which has DX11 feature level but much less cores, it was running fine but very close to the minimum frame time with only the terrain.
I'm thinking tessellation might be good for smaller tasks like morphing in character animation when the character is close to the camera.
Tessellation is indeed interesting for very dynamic surfaces like character's faces and water simulation. Like i told you, i need to get a good grip of it and the associated cost.
I may also have to support DX10 level hardware so i will need a falback.
Tank you for your post, i will read your references when i get back home.