I would suggest that the middle/default difficulty is probably what the developers considered "most balanced." Fortunately this game doesn't do the classic BG thing and hobble your experience gains for playing on low difficulty, so there's no harm from having played on the "wrong" difficulty for your abilities for a while.

I would suggest using max HP on level ups, but note that if you meet characters late in the game they will have rolled HP for levelups from when you weren't around, so it can lead to a bias toward using the characters that are available in the early game, which can have you missing ot on sweet Vhailor and Modron content.