But there is a bar of complexity at which they fail, and repeated invocations typically doesn’t make much progress. This is a small subset of most work, but it still exists. And yes you can help it along, but in those cases I’d typically break out the big guns.
How can they be higher quality than models they were distilled from?
The word "distillation" is not specific to AIs, has been in use for 100s of years, and does not mean the same thing as "dilution".
It means "getting a more concentrated form of the original product".