doesnt seem to do anything but make my enemies have more health. which doesn't make them harder.

i think they followed the Fallout formula or maybe they used it even before in Oblivion and morrowind, but upping the difficulty up the health pool but also changes the dmg % that they do to u and the dmg % u do to them.

I haven't checked whether enemies have more/less health at the various difficulty settings, but according to UESP the difficulty settings affect the amount of damage you do to enemies and how much damage they do to you...

http://www.uesp.net/wiki/Skyrim:Combat#Difficulty_Level