Pub 502

You must reduce your total medical expenses for the year by all reimbursements
   for medical expenses that you receive from insurance or other sources during the
   year. This includes payments from Medicare. 

   Generally, you do not have to reduce medical expenses by payments you receive
   for: 

        Permanent loss or loss of use of a member or function of the body (loss of
        limb, sight, hearing, etc.) or disfigurement that is based on the nature of the
        injury without regard to the amount of time lost from work, 
        Loss of earnings, or 
        Damages for personal injury or sickness. 

   You must, however, reduce your medical expenses by any part of these payments
   that is designated for medical costs. See How To Figure Your Deduction, later. 

   What If Your Insurance Reimbursement Is More Than Your
   Medical Expenses?

   If you are reimbursed for all of your medical expenses for the year, you do not
   have a medical deduction. 

   Premiums paid by you. If you pay the entire premium for your medical insurance
   or all the costs of a plan similar to medical insurance, and your insurance payments
   or other reimbursements are more than your total medical expenses for the year,
   you have excess reimbursement. Generally you do not include the excess
   reimbursement in your gross income. However, gross income does include total
   payments in excess of the per diem limit for qualified long-term care insurance. See
   the Form 8853 instructions for the per diem amounts. 

   Premiums paid by you and your employer. If both you and your employer
   contribute to your medical insurance plan and your employer's contributions are not
   included in your gross income, you must include in your gross income the part of
   your excess reimbursement that is from your employer's contribution. 

Premiums paid by your employer. If your employer or your former employer
   pays the total cost of your medical insurance plan and your employer's
   contributions are not included in your income, you must report all of your excess
   reimbursement as other income. 

   More than one policy. If you are covered under more than one policy, the costs
   of which are paid by both you and your employer, you must first divide the medical
   expense among the policies to figure the excess reimbursement from each policy.
   Then divide the policy costs to figure the part of any excess reimbursement that is
   from your employer's contribution. 

   During the year, you paid medical expenses of $3,600. In the same year, you were
   reimbursed $2,500 under your employer's policy and $1,500 under your personal
   policy.