Ages ago I made a tool that does a similar method (rewrite the least-significant N bits of a pixel in the cover image with the most-significant N bits of the corresponding pixel of the hidden image). In my tool N is configurable.

The main pitfall is that it doesn't work very well if the output is saved as a JPEG because of the compression.

I think OP's idea of encoding all of the bits of the hidden image, by using a cover image with more pixels, is a good improvement: you get no loss of quality in the hidden image, and you vastly reduce the loss of quality in the cover image.

https://incoherency.co.uk/image-steganography/