Perhaps I am just doing something wrong. Ran an encounter for my PCs from WBtW. They were fighting Bavlorna (due to PC decisions). I was able to control and modify Bavlorna and her quicklings HP blocks, However I was unable to track PC HP the same way, and all of them were playing on paper sheets (as they prefer that route). Is there something that i am doing incorrectly in my building/encounter setup? 

If this isn't the thread/forum for this please direct me to the correct one.

No, the DM cannot. That field is automatically filled from the character sheet when the player adjusts their character’s HP.

So using the Encounter Tool with players that prefer Paper makes it a worthless tool for the DM? That seems counter intuitive as it should be friendly to any style of play. Additionally while it was in testing I was able to adjust HP and use it to track HP of all PCs. Why was it made less functional as a tool in its current iteration?

While the feature was in testing it did not interact with the character sheets at all. People complained about that, and wanted the character sheet information to feed directly to the DM’s screen. Since there are caching issues with DDB due to the siloed servers and som information caching on the client’s side, if both the players and the DM could interact with that field, then there would constantly be a potential conflict between the two which could cause errors. (The connection goes both ways unless blocked as it is currently.) Ideally, there would be a toggle for the GM to flip for whether they wanted that information linked directly to the player’s character sheet or not.

Agreed on the toggle switch. As it is the efficacy of the tool is seriously limited for groups that prefer the paper sheet to digital sheet. Not a fan of that change, though I was pleased that it imported from the campaign. Not being able to track player HP on it is my only gripe, as the tool really streamlines my combat past that.