The following is a rush transcript of the July 26, 2009, edition of "FOX News Sunday With Chris Wallace." This copy may not be in its final form and may be updated.

BRET BAIER, GUEST HOST: Joining us now for more on the health care reform debate, the number two Republican in the Senate, Jon Kyl — who comes us from his home state of Arizona.

Senator, welcome back to "FOX News Sunday."

SEN. JON KYL, R-ARIZ.: Good morning, thank you.

BAIER: Senator, you're on the Senate Finance Committee, seen by many here in Washington as really the only way to get a bipartisan piece of legislation, when it comes to health care reform, out?

Give us the behind-the-scenes of what's happening with the Senate Finance Committee. And will a deal get done?

KYL: First of all, to set the stage in the House, there were three different committees, and they have not been able to bring a bill to the floor yet. They were hoping to do that within this next week, but that doesn't look likely.

In the Senate there are two committees, the Health, Education, Labor and Pensions Committee, which has reported a bill out. It's very much more along the lines of the House bill and what the president has talked about.

And then, in the Finance Committee, which is supposed to write key parts of it, particularly talking about how to finance all of this, we have had a lot of meetings, both formal and informal meetings, but there's been no product yet.

And one of the reasons, as you point out, is that this is very hard. It's hard to get Democrats together to agree on a bill, let alone Republicans.

I think it's important to remind folks that Democrats have a 60- 40 majority in the Senate, and a bigger margin than that in the House. So if they all got together, they could pass a bill. This isn't being held up by Republicans.

But it's hard. And so there have been a lot of informal negotiations over the past three or four weeks. No bill has emerged yet. I think it is probably unlikely that we will actually produce a bill in the committee before the August recess.

But, Bret, I want to say, I think that's a good thing. You know, this is a democratic republic, where the people are supposed to tell us what to do. They've now heard about a lot of different plans, and I think it's a very good thing for us to go back home over the August recess, lay it out to our constituents and say, "All right, folks, what do you think we ought to do? Here are the pros and cons of all of these different proposals."

The American people need to speak to this. And I think, if they do, we'll make much wiser decisions.

BAIER: Senator Chuck Grassley from Iowa is the ranking member of this committee, the Senate Finance Committee. Do you trust that Senator Grassley will be able to negotiate something that you will be able to sign onto?

KYL: I'm not at all sure. And Chuck's had a hard time. And Mike Enzi, who is our ranking member on the HELP committee and is also a member of the Finance Committee, has been involved in those conversations as well. And we talk about this a lot. He brings back reports frequently of very difficult divisions.

Part of it is these CBO scores that you talked about earlier. Again, for folks watching, the Congressional Budget Office is required to tell us how much he, the director, thinks it's going to cost, so that we can try to find ways to pay for it or to reduce expenses in some area so that we come out, net, without having any increase in cost.

It turns out that the Congressional Budget Office, in scoring these different proposals, has scored very little savings and huge costs, so that we'll have a deficit under either the House bill or the Senate bill, anywhere from $240 billion to $600 billion.

And they're having a hard time doing as much as they want to do and still not having that kind of budget deficit.

BAIER: What are the key sticking points for Republicans?

What are the Republican alternatives that possibly could — could make a deal, going forward?

KYL: Let me answer that two ways. First of all, there are specific problems in our health delivery system today, especially costs for small businesses, ensuring their folks and some folks that have preexisting health conditions and so on.

But according to a Fox poll, 91 percent of Americans have insurance and 84 percent rate their insurance "good" or "excellent."

So Republicans believe that what we ought to do is focus solutions to the specific problems that are — that exist today and not scrap the whole system and impose some kind of new government-run regulatory system, which is what the bills that the president and the House and the HELP committee are — are doing — that the American people don't want, either.

So let me give you some specifics. And this goes to the second part of it.

One of the things that the president never talks about, because of support of trial lawyers, is the fact that we have a — a jackpot justice system, in terms of liability lawsuits. And we've got to get a handle on that.

Republicans want to reform that. We believe that could take a $100 billion a year in excess costs, defensive medicine practiced by physicians, out of the system. That's a way to reduce costs by perhaps $100 billion.

Newt Gingrich has talked about the fact that there is anywhere from $60 billion to $120 billion in Medicare and Medicaid fraud. Insurance companies pay a lot of people to weed out that fraud because they couldn't stay in business if they had to eat those kind of numbers.

Medicare (inaudible) the taxpayer money. You've got a huge amount of fraud in there.

Third, one of the problems is that small businesses can't band together and have the same kind of purchasing power that big businesses do. And so we support association and small-business health reform.

Fourth, here's a big one. We believe that insurance companies should be able to sell health insurance across state lines just like life insurance, car insurance, all the other.

You can buy a car insurance policy from State Farm anywhere in the — in the country. There isn't a big enough risk pool in a lot of the states to have affordable insurance, and therefore, if they could sell across state lines, it would provide that for them.

HSA reform — health savings accounts. We should be able to pay our premiums from savings accounts. Individuals should have the same kind of tax deduction as businesses do.

A big business ought to be able to get its claims information from insurance companies so that they can compete their insurance.

I could go on and on. There are a myriad of specific proposals that we support, and they would all have one thing in common. They would either provide greater access or reduce costs. And they wouldn't interfere with the coverage that most Americans have and like.

BAIER: So, Senator, I guess the bottom-line question: The chairman, Senator Max Baucus, and the ranking member, Chuck Grassley — do you think, with the long list of things you just mentioned, that there is a bill that can come put of Senate Finance that is a compromise?

KYL: I sincerely doubt it. Because none of the things that I just talked about have been accepted by the Democrats. President Obama, as a senator, voted against most of the things that I just mentioned.

Those are all good ideas. They're Republican ideas, and our colleagues have voted a lot of them down, have not incorporated them into the bills.

One other thing: Why do they keep voting down Republican amendments to ensure that those — that there is no rationing of health care?

I mean, at the end of the day, what really matters is what your doctor says you and your family need, and you having the ability to provide that for them.

Instead, the Democrat bills insert the government in between to set the rules on what insurance policies can cover and not, what Medicare and Medicaid can cover and not, and essentially ration the care that we would get. That's their way of cutting costs.

We keep offering amendments that say, whatever else you do, don't ration care; don't impose policies that would delay or deny care to Americans. And they keep voting these amendments down. Why?

Because, of course, at the end of the day, I think most of them appreciate that they are going to be rationing care, and that's the wrong way to go.

BAIER: So, if you were to guess today, you would say it's, what, highly unlikely that the president would be signing a health care reform legislation by the end of the year?

KYL: The only way that I think he will sign it — and it's quite possible that he'll have something to sign — is, frankly, if the American people say, we don't like the direction this is going; the costs; adding to the deficit, the new taxes; you don't get to keep the insurance that you have; rationing of health care; why don't you — instead of trying to redesign the entire health care system, why don't you focus solutions to the specific problems that increase the costs and help those small businesses and individuals get the insurance at an affordable cost as we've discussed.

I think once they scrap the bills that are out there right now and start over with this approach, we'll have a good chance of doing something meaningful.

BAIER: Senator, your colleague from South Carolina, Senator Jim DeMint, said this, this week: "If we're able to stop Obama on this, it will be his Waterloo. It will break him." Your colleague from Oklahoma, Senator Jim Inhofe, said this, "We can stall Democratic effort on health reform. We can stall it, and it's going to be a huge gain for us, who want to turn this thing over in the 2010 elections."

Senator Kyl, do you agree with them?

KYL: I don't agree with that kind of language. I know what Jim DeMint has said is that he wanted to break the momentum of the inevitability of passing these liberal health care bills. They said we had to pass stimulus and do it immediately, or else the economy would see 10 percent or 8 percent unemployment. It's not going to 10 percent.

And what we're saying is, slow this down so that we don't do — we don't make another bad mistake here. But I do think that because the language has a political implication, it's unfortunate.

Both sides talk about the politics of these issues. I don't think we ought to be focused on that.

BAIER: Do you think the president is in trouble with his polls sliding in recent days and weeks?

KYL: Well, from a purely political standpoint, yes, but again, that's not my main concern right now. He's only been in office six months, and he's got a long way to go. And right now, I'm more focused on issue like the health care that we've got to get right, and I think we need to take the time to do it. And if that means slowing down the momentum of all of this so the American people can instruct us when we come back home, then I think that's what we ought to do.

BAIER: On the topic of funding abortions and whether federal dollars, tax dollars would be used for that. Asked recently about that, if that would in fact happen as the bills that have already passed committee, it does happen, the president said rather than wading into that issue at this point, I think it's appropriate to figure out just how to deliver cost savings. Do you believe that the president is stepping back from that, and there will be some kind of commitment that federal dollars will not be used on abortions?

KYL: I hope so. Unfortunately, in the Democratic bills that passed the House and the bill in the HELP Committee, that's not the case. Funding of abortions is required.

I used to as a lawyer represent a Catholic hospital. They do not want to have to do these kinds of things, and yet there's language, mandatory language in some of these bills.

The president should step back from that. That would be bad policy.

BAIER: Now on to Supreme Court nominee Sonia Sotomayor. The vote in the Judiciary Committee is Tuesday. You have announced you are going to vote against that nomination. However, at least one Republican on the Judiciary Committee, Senator Lindsey Graham, has announced he will vote for her. How many Republicans do you think will vote for her on that committee?

KYL: I'm not sure. It may just be one. Republicans are not trying to get a big vote either for or against Judge Sotomayor. Each individual Republican can vote however he or she wishes. I will vote no.

Incidentally, I will tell you that if it were a matter of having to get her out of the committee onto the floor, I would vote yes so that the full Senate would have an opportunity to vote on her, but I think it's clear that with the huge majority the Democrats have on the committee, that that won't be an issue.

I was very disappointed in her answers to the questions that we posed during the hearings, and if you want to get into a little bit more detail, I'm happy to do that. I was very disappointed.

BAIER: Well, what kind of justice — it appears she is going to pass easily and be confirmed. What kind of justice do you think she'll be?

KYL: One of the problems is that I don't think we know. There is the Judge Sotomayor that rendered certain decisions, the Judge Sotomayor that gave certain speeches, the Judge Sotomayor that testified before our committee, sometimes in contradictory ways. And it will depend on which one actually starts deciding cases. And because I think she has some burden of convincing us of her positions on these issues, she certainly did not carry that burden, as far as I was concerned, in the committee. I will be voting against her.

BAIER: OK, finally, Senator, Alaskan governor Sarah Palin is stepping down today. Do you think she's going to run for president?

KYL: I have no idea. I think one of the reasons she may be stepping down is she wants to get out of the public limelight, with all the attention being paid to her every move, and get back to a semi-normal life. I have no idea what her future plans are.

BAIER: Do you think that was the right move?

KYL: I — I don't want to be critical, because you never know what a family's specific situation is. I, kind of, wish she had decided to stick out her term as governor. I think she was being very effective. The voters obviously had a lot of confidence in her.

And once you start a job like that, it seems to me that you should try to finish it, unless there are really extenuating circumstances. And she did talk about the difficulty for her family. And, after all, our families should come first. So I'm just not sure.

BAIER: Senator Kyl, thanks for sharing part of your day with us. Please come back.

KYL: Thank you, Bret. You bet.

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