1099R code 1 but qualifies for medical expense reduction

The 1099-R issuer is responsible to report money Out. They have no idea what else is happening. If the withdrawal was for a qualified medical expense but incorrectly coded as 1, you will need to file Form 5329 to claim the exception.

In ProSeries click on "Where Do I Enter" near the top right and type in 5329.   This will open the form for you to enter the amount of the distribution attributable to qualified medical expenses. (Note that there are two available one for taxpayer "5329-T" and one for spouse, if applicable "5329-S".)

You'll find that entry on Line E.  There are two columns - one for SIMPLE distributions and one for Non SIMPLE (Traditional IRAs, generally).  Enter the amount of medical expenses that exceed 7.5% of the taxpayers AGI in the appropriate column for Line E.  

You will find the 7.5% number is calculated for you on Schedule A, Line 3, after you have entered all income (including the 1099-R) and medical expenses.