Let me start with the easy one. An indemnity is not a reimbursement but you are required to separate out the payments you made vs the payment you received. Only medical bills above the indemnity would be included or you can claim it all and subtract out the indemnity as a reimbursement in the program. The final total goes on Sch A with medical bills and as long as that number is correct, the method to arrive is moot.
You can't double dip and claim the same medical expenses in more than one place. I suggest you maximize by claiming what you can as a negative adjustment. Let's move the adjustment from the other income not on w2 or 1099 to other reportable income instead. This should allow the negative income.
Subtract your expenses
1. Miscellaneous Income, 1099-A, 1099-C, Start
2. Scroll to the bottom
3. Other reportable income, Start
4. Other taxable income?
5. Select YES
6. Description
7. Amount, enter your negative amount
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