To be moved to a medical scholarship, the medical staff has to declare he isn't able to be cleared to ever play again. IE he isn't eligible to "return" to the program. He would get to keep his scholarship, but wouldn't count toward the 85 limits nor would he be able to participate with the team. The player can forgo the medical scholarship and transfer if he wants to try and clear at a different program.
This is completely different than a 6th year Wavier that grants a 6th year of eligibility to a player that lost 2 years to injury... this is the waiver McMillon received. Instead of the normal 5 years to play 4, he was granted 6 years to play 4.
As for a medical red shirt or more correctly, a medical hardship waiver... those do not exists anymore in football at least. It used to be that if you got injured in one of the 1st 4 games (1st 30% of season) of the year that ended your participation for that year, you could apply for a medical waiver and those games would be be removed from that year of playing... IE you lose a year on the time clock (5yrs. still becomes 4yrs), but you don't lose a year on the eligible clock (4 doesn't become 3). Current rules allow you to play 4 games in a year and not count it towards your 4 year eligibility clock so a medical hardship waiver is pointless.
I don't know what was the issue with Knott... so I can't dive into his situation to deep, but from what Saban has said in past pressers It sounds like he was moved to a Medical Scholarship and because of that I don't believe he is able to return to the program. Maybe there are exceptions, but I've not ever heard of one in my limited experience.