Just did some more testing.
Install tool 1, select tool 1 with H1 - Probes fine, touches off then goes up 1"
Install tool 3 select tool 3 with h3 - Comes down until contact, then pauses and drives down into the touch pad by 0.3"
Send G43 H1, keep tool 3 installed - Probes until it touches and then retracts up 1" as intended.
It seems that the H# gets pulled into the touch off macro somehow and is added to the 1" subtraction because tool 3 is 1.3" longer than tool 1.