• This is a rush transcript from "The Journal Editorial Report," August 7, 2010. This copy may not be in its final form and may be updated.

    STUART VARNEY, GUEST HOST: This week on the "Journal Editorial Report," a federal judge deals a blow to Obamacare and clears the way for a constitutional challenge that could go all the way to the Supreme Court.

    Plus, has his magic touch turned into the kiss of death? Why some Democrats are dodging the president as campaign season kicks into high gear.

    And to build or not build. Both sides weigh in on the plans for a mosque just blocks from Ground Zero.

    Welcome to the "Journal Editorial Report." I'm Stuart Varney, in this week for Paul Gigot.

    It is the biggest blow yet to the future of Obamacare. Judge Henry Hudson this week denied the government's motion to dismiss a lawsuit brought by the state of Virginia challenging the new health law. Judge Hudson's ruling states that "It is far from certain that Congress has the authority to compel Americans to buy insurance and penalize those who don't."

    Betsy McCaughey is the former lieutenant of New York. She is the author of "Obama Health Law: What it Says and How to Overturn It."

    Betsy, is this court ruling the start of the unraveling of the health care reform?

    BETSY MCCAUGHEY, AUTHOR & FORMER LIEUTENANT GOVERNOR OF NEW YORK: It may well be, yes. It's a very positive sign. Last November, House Speaker Nancy Pelosi was asked, is it constitutional to require Americans to buy a one-size-fits-all health care plans and she's, "Are you serious? Are you serious?" Judge Henry Hudson said it is time to get serious and apply the Constitution, something that Congress didn't do before they passed this law.

    VARNEY: This is all about the mandate that you must buy health insurance?

    MCCAUGHEY: Or pay a penalty.

    VARNEY: Or pay a penalty. If that is cut out, if for whatever reason it is cut out, does the health care reform plan collapse?

    MCCAUGHEY: Yes, it could fall like a house of cards. Most conflict legislation includes a boiler-plate provision that says, if one part of the law is struck down, others will remain enforceable. The authors of this law actually removed that boiler plate before the final version was passed. And both the deliberations about passing the law and even the court papers filed by the administration in this case suggests that they all agree that this law cannot stand without this mandatory provision.

    VARNEY: What are states going to do as the legal situation is sorted out?

    MCCAUGHEY: This is important. The states are being pushed hard to implement insurance what are called insurance exchanges and other costly changes to accommodate the Obama health care law. Now the states, which are short on cash, are to slow down preparations. And that will be a bruising blow to this health law.

    VARNEY: A bruising blow. Is it that serious?

    MCCAUGHEY: Oh, yes.

    VARNEY: Is this a real a setback for reform?

    MCCAUGHEY: Yes, because, first of all, Judge Henry Hudson said, of course, there are serious constitutional questions here. The administration all along made an argument that it was necessary to force people to buy insurance in order to spread the cost over more people and avoid people getting health care for free. But that an ends-justifies-the means argument. Virginia came in and made a constitutional argument saying, no matter how wise it is, it is not within the powers of the Constitution. The Virginia folks cited the Federal Papers and 200 years of Supreme Court history saying that the powers of Congress are limited and doesn't include forcing Americans to buy anything.

    VARNEY: That's the legal fight. That's the constitutional fight.