so far as i know, medmod will not change the AI behavior in battles but it will do so on strategic map.

one thing is for sure - once you will play on hard or expert, AI will be much harder to beat due to morale bonuses and wiser tactics such as opening to loose formation under archer fire, more common use of trees and other tactics that more skillful human player will use.

so if u feel that AI is not challenging enough on easy and normal, try playing at least on hard...