Due to the higher difficulty my progression has been slow. And I am grinding for levels just so I don't get one-shot'd. And I'm still at the beginning of the game I would say, I just got made seeker. A lot of the fights that don't let you stealth or lay out traps are just brutal.
A friend of mine did a lets play on the game, so I know the fight you are talking about. I'm sure I'm going to have to lower the difficulty to get passed some of the more challenging Boss fights. But the thing is, I don't want to.
I like the challenge in a "GIT GUD" kinda way. And since it doesn't punish failure harshly its all about persistence, planning, and laying traps. I was stuck for a bit on the final fight of the Dreamwillow mission, you have to fight a Sawtooth and two Watchers. It took a combination of Overriding the Watchers from stealth you chip away at the Sawtooth and shock traps to get it on the ground. Took about 15 tries but I got it, and I felt like I earned it.
I would say that's biggest thing the increased difficulty brings to the game, the machines are super aware. Unless you are in cover, they will see you crouched or not. The higher difficulty changes the way you play it. It goes from an action game to a stealth game. Also the arrows seem to do less damage? Not sure, might have to try it on a lower difficulty to see. I'll let you know.
Have you been upgrading weapons ASAP when you access them? There aren't many tiers, but each time you unlock more upgrade slots things go up pretty exponentially in power because a +10% damage boost makes quite a difference.
I think I used Override once through the whole game, to the point where I didn't even think about it while writing this whole thing.
Difficulty definitely adjusts damage (I started easy and switched to story because I was tired of whittling away at snapjaws in the open world). I know Story nerfs incoming damage (which I don't like), but I think the main adjustment above that is to outgoing damage. The fancy armor you get for collecting all the power cells also reduces how much of a shield it gives you before running out at higher difficulty.
Honestly I think they made stuff more expensive and give less shards when killing. I haven't been able to afford anything besides what's been gifted to me. Even with all the grinding I'm doing, I'm pretty broke.