Basically, every mission spits out a predicted amount of damage that the player is probable to take across the mission (I don’t have the exact details how this is calculated, but it’s based on a number of factors including enemy strength and composition).
So say you go on a mission where you’re expected to lose around 20% of your HP on a mission. That could be 20% each from 5 soldiers, or it could be 1 dead soldier from a group of 5. It’s looking at an average number.
If the player repeatedly completes missions and doesn’t take as much HP loss as is predicted, the difficulty goes up. Equally, if the player consistently takes more damage than the upper threshold, the game will get easier.
These numbers are being adjusted in the March 4th balance patch in favour of the player. So a mission where you may have been expected to only return with 80% of your health might now be 90 or even 95 (just making these numbers up for the sake of example).
But this means that the difficulty won’t increase as often if you’re not taking enough damage. Of course, if you complete every mission and take no damage, the difficulty will increase (as it should do). The problem is, the game can’t tell if the player isn’t taking damage because they’re good/game is too easy - in which case the difficulty should be increasing, or if it’s because the player is save-scumming.
Please keep in mind that this is also only one part of the balance patch changes. I just wanted to offer some more insight into how it worked.