Let me try again. I think that Deutsch is saying that h is the proposition "smoker implies cancer", and e is a specific instance of a person where the hypothesis holds (either a nonsmoker or a smoker with cancer). He is talking about e being instances of h, so h must be a higher order proposition about instances.
But now h can be decomposed as we said into a logically necessary part (h|e) and a part (h|~e) that may be true or false depending upon which universe you live in. By the argument above, finding more instances of the theory should decrease our belief in the (h|~e) part. Since h|~e is the same as e->h, gathering more e should decrease our faith that the evidence validates the hypothesis.
Presumably Deutsch is saying that the logically necessary part is sort of trivial (a mere theorem) whereas (h|~e) has actual physical content, so why do we believe that the evidence increases our confidence in the physical portion of the hypothesis?
By the way, I got all this math from the unapproachable paper, which is not that unapproachable if one looks at the math alone. Like you, I am trying to figure out how this math applies to the real world.