This is a rush transcript from "On the Record," July 31, 2009. This copy may not be in its final form and may be updated.

GRETA VAN SUSTEREN, FOX NEWS HOST: Health scare plan? Is that what the president is promoting, health scare? Well, that's what Karl Rove says. He joins us here in Washington. Health scare?

KARL ROVE, FORMER GEORGE W. BUSH ADVISER, FOX CONTRIBUTOR: Well, he's adopted a much different tone here the last several weeks, starting in his news conference. I thought it was a -- if they had not been overshadowed by his involvement in the [Henry] Louis Gates arrest, I think we'd all be talking today about the comments that he made about doctors, where he said doctors routinely give you the blue pill, or the red pill, I can't remember which, which is twice as expensive as the equally effective other color pill. And then his allegation that doctors routinely do tonsillectomies in order to fatten their wallets. I mean, those were pretty extraordinary statements.

VAN SUSTEREN: I got a lot of e-mails from doctors about that one.

ROVE: I did, too. And I think it touched a nerve because, you know, he was basically insinuating that the -- all that the health care professionals really worry about is their own personal financial situation and not about your health care. And we saw it in the tone that night. In his -- in his statements at the news California, he talked about -- you know, it was a much more dark, you know, discussion, not about what this could do for the country, but how people are afraid of losing their health insurance and more people were going to lose it.

And he began to talk not about health care, which he'd been doing so for the past six months, but began talking about health insurance reform. And we found out this week in an article in The Washington Post the reason he did that was his pollster found out that insurance companies were not well liked, and so he advised the president that he needed to shift from talking about health care reform to talking about insurance reform.

VAN SUSTEREN: Do we need, in your opinion, health care reform?

ROVE: We -- yes, the system needs to be improved, but the question is, what kind of change? I mean, the president has recommended a change in which government assumes a much larger role in health care and decisions would be made more by professionals, not your doctor, but by professionals in Washington, and the dictates will come from, you know, some big bureaucracy, rather than the decisions being made by a doctor.

VAN SUSTEREN: But isn't that being done now? When you -- when you go to get a procedure or something, gets rejected by the insurance company -- I mean, isn't it, you know, unfortunately, sometimes your doctor can't make the decisions, but the insurance company, some non-medical person is?

ROVE: Sure, but you have an -- you have an ability to appeal that, and you have the ultimate ability to say, All right, you know what? I don't like my current carrier. I'd like to get a different insurance, which particularly in small businesses and when a small business owner's unhappy, he can shift his insurance.

But look, the question is, what do we need to do? And I think there are lots of good things that we can and should do that will make health insurance more available and more accessible to people. We need to have a national market for health insurance, to begin with. You know, you can buy your auto insurance across state lines, but you can't buy health insurance across state lines. And we know that the bigger the market, the more competition there is, the lower the prices go and the better the benefits get. We've seen that in health -- in auto insurance. We'd see the same in health insurance if we did it.

If you're in northeast Pennsylvania and you're 25 years old and a male and healthy, your health insurance is roughly one third the cost of somebody living 25 miles away in southwestern New York.

VAN SUSTEREN: Why?

ROVE: Because we don't have a national market in health insurance and each state sets its own set of peculiar rules and the limitation of the market. If you're in a small state, if you're in North Dakota or South Dakota, that's a relatively small state, so the market is relatively constricted. If you can be locked (ph) into a national market, like you are with auto -- with auto insurance, where if you're in North Dakota, you can buy your auto insurance from a lizard in Bethesda, Maryland. You know, you are not obligated to buy from a company that has to operate within your borders.

VAN SUSTEREN: Dick Morris was on here last night, and he said that -- that the health insurance -- or the health care reform that's being proposed by Democrats will -- will harm elderly people, that essentially -- I mean, he said some very sort of provocative or scary things. In what way does this health care reform, as we know it now -- does it have a direct impact on the elderly or not?

ROVE: Well, I think it will because, look, it's going to have an effect on everybody because what I think we're going to see is we're going to see a system that loses innovation, that loses the ability to create these new drugs and these new techniques that extend life and provide a greater quality of life. We're going to see it be less attractive for investment in the health care field, whether it's in a hospital or an extended-care facility because, look, the government is going to set prices.

It does it in Medicare. In Medicare, the average doctor gets 81 percent for an operation or an action (ph) -- gets 81 percent of what a private insurer would pay for that same operation under Medicare. Hospitals get an average of 71 cents for each activity they take, compared to what they would get paid by a private insurance company. And why? Because the government dictates the price that it's going to pay.

Now, what happens is they still end up paying the same price for conducting that service, providing that service, but they have to pick up the cost of it by shifting it to people who are not in Medicare. That's why doctors say, I'm going to limit the number of Medicare patients I have and Medicaid patients that I have, because, in essence, each patient I get is going to cause me to be putting money out of my own pocket in charity care. So here's how much charity care that I'm willing to provide, and that -- that therefore dictates how many patients I'm willing to take on.

VAN SUSTEREN: If it became a government-only system, I mean, that -- I mean, at least that's what the prediction is, that it would lead to a government-only system under the -- on the currently proposed -- because the government would be cheaper, right? And everyone would go for the cheaper?

ROVE: (INAUDIBLE) except the prices. It wouldn't be cheaper, it would just sort of arbitrarily fix the price, as it does in Medicare, and shift the costs on to other parts of the system. But if everybody falls into the government system, or even a significant number of people fall into the so-called public option, the government-run plan, then, in essence, it craters the private insurance market. We have 1,300 companies in America providing private health insurance coverage. The thought is -- there have been several studies, one of them looking at one proposal suggested as many as 70 percent of Americans would lose their private insurance coverage as, in essence, these companies collapsed.

VAN SUSTEREN: All right, I'm all in favor of people making money, but I'm curious about these insurance companies. You know, are they making an extraordinary amount of money? I mean, we've seen, you know -- of course, everyone's horrified at these huge bonuses on Wall Street, but are they making a lot of money or not?

ROVE: Well, you need to look at it over time. Right now, they've had healthy profits, but I mean, those profits...

VAN SUSTEREN: What's a healthy profit?

ROVE: Well, you know, enough so that they can take a look -- they have actuaries who look at the clients that they have and make an estimate as to how much insurance needs they will have in the future, how much they will draw, compared to their premium, and then they adjust the premium up or down based on that.

But look, here's the great thing about this, is whatever their profits are, remember, they've got people looking over their shoulders and they know that the market is not static in that they can lose customers if they have their premium high and they can go bankrupt if they have them too low. So they're constantly searching for what's the -- what's that golden mean in between the two. And so that's what we want, is we want people out there worried about -- in running these companies, worried about keeping their customers and keeping their customers happy.

That's why -- look, 84 percent of Americans -- 80 -- Americans -- 84 percent of all Americans say they're happy with their health care coverage. Ninety-one percent of the American people claim they have health insurance. Now, we're not certain that's exactly right, but in the FOX poll, 91 percent said they have private -- they have coverage. Eighty-four percent of them said that they were happy. That means that 76 percent of all Americans have coverage and are happy with it. So President Obama faces a problem when he looks like he's trying to disturb what three out of every four Americans already are happy with what they've got.

VAN SUSTEREN: The fact that this is pushed off until September, from a purely political, strategic point of view, pushed off to September, is that a loss, is that a hit for the president?

ROVE: It is because he was the one who set the guideline -- the goal of getting it done by -- of having votes in the House and Senate by the end of August. I never understood why he did it because this is such a complex problem, it is so large, the piece of legislation is going to be so voluminous, the questions are so contentious and the answers so murky that this is not something that could be done quickly.

And particularly after -- look, he passed a $787 stimulus bill. He passed a $410 billion omnibus spending bill. He did the bail-out of GM. He had $350 billion left in the TARP funds that he then expended. He had a several tens of billions of dollars worth of expansion of the S-CHIP. And then he turns around and says, Oh, incidentally, I want to quickly get a health care bill by the end of August, and the price tag is going to be $1.6 trillion. And the American people said, Whoa! Wait a minute!

VAN SUSTEREN: Why did the American people finally say, Whoa, wait a minute, let's look at it? I mean, they didn't with all those other...

ROVE: Well, first of all, he came -- look, conditions were a little bit different. He'd just come into office and he was able to push it through. But this is so complex and so big that you match that with people starting to say, You know what, we're spending too much money, the red ink is getting too big -- the budget plan was a key element of this.

Remember, here's where he comes out with a plan for his budget that says, I don't -- you know, I want to plan to have a doubling of the national debt in five years and a tripling of it in the next 10 years, and I want to have gigantic, you know, streams of red ink that go into a veritable flood of red ink over the course of my -- you know, hopefully, he says, eight years in office.

And the American people said, Is that what you're planning to do? That's not what you're warning might happen, that's what you are planning to do. And that was based upon rather optimistic growth and revenue projections and is likely to understand the amount of -- of red ink.

VAN SUSTEREN: Karl, stand by. We're going to have more with you in two minutes.

The photo op that sent terrified people running for their lives -- well, now we have the pictures, one of the -- of the infamous Air Force One flyover of Manhattan. We're going to show you that next.

And then Senator John McCain goes "On the Record." Will the government take over your health care? Not if Senator McCain has anything to say about it.

Plus: Why is former first lady Laura Bush making headlines? Why did country star Tim McGraw fight with a fan at a show? And why is this tow truck floating in a swimming pool? Find out in the "Best of the Rest."

(COMMERCIAL BREAK)

VAN SUSTEREN: Well, these are the photos the government didn't want you to see. April 27th, the White House sent terrified New Yorkers running for their lives when a 747 used as Air Force One buzzed Manhattan for a flyover. It was also a photo op, and then -- oops! The White House decided not to let anybody know about it before it happened. As you probably remember, a huge controversy exploded when the White House would only release one photo. Now, we knew there had to be more. What photographer only takes one pic, right? Well, FOX News fought to have all the pictures released, and finally now, three months later, we have them -- finally today.

Karl is back. Karl, first of all, $300,000 (INAUDIBLE) is horrible, I mean, but why'd -- why'd they sit on this for three months?

ROVE: I don't know. But look, the photos are OK. They're fine. And I can understand they want a nice photograph. But what's...

VAN SUSTEREN: They could have Photoshopped it for free!

ROVE: Exactly. But even better is to read all the e-mails that they released when -- I read them this afternoon, and they're fun to read because it's sort of like Keystone Kops. And it's -- and you -- and it's lovely to read the e-mail exchanges as they run up to the event, and then really need to read the e-mails in the aftermath (INAUDIBLE) everybody's trying to discover what the heck is going on and why this all happened.

VAN SUSTEREN: Well, you know, that means (INAUDIBLE) the stupid thing was, is if they'd just released them when we asked them at first, we wouldn't have gotten the e-mails because we wouldn't have made the Freedom of Information Act request on May 1st, which now has provoked the e-mails, which we now see. So what's your favorite e-mail?

ROVE: Well, I've got two. I want to meet Major Suzanne (SIC) Romano or Susan Romano, who is the public affairs officer for-- the director of public affairs for the headquarters of the 1st Air Force in Tyndall base, which is near to my beach place in Florida. She writes one after this all happens. "Nothing like having everyone point the finger at someone else so we can all look like a big bunch of buffoons. Can anyone say Moe, Larry, and Curly?"

I mean, she had nothing to do with all this, but she has a pretty, I think, effective comment on the whole thing.

VAN SUSTEREN: Great e-mail. Great e-mail.

ROVE: Yes. My second favorite is from Brigadier -- or excuse me -- Major General Brian Meenan, who deserves a promotion because before the event takes place, he receives a heads-up and he says, "Odds could be remote, but for your SA, I'm influenced here by being domiciled in Newark with Continental. New York City populace can be sensitive to airplanes that appear lower than normal or on tracks not normally seen over the New York City area. Influenced by 9/11."

So he signals to the authors of this idea, You better be careful about the people in New York. He then goes on to say, "Shifting gears, you failed to state if you were flying this one. If so, man, what a good deal. And can I carry your bags?" He tried to hook a ride on the flight.

VAN SUSTEREN: This is horrible! I mean, it cost $300,000. The taxpayer paid for it, that it could have been free. They scared the living daylights out of the New Yorkers, and then -- then they tried -- then they fought us on the pictures.

ROVE: Yes. Well, look, they could have gotten this photograph on a time that the president was going to New York, and they could have let people know it was going to happen and the president -- and they could have taken the photograph of the president -- you know, the Air Force One flying into New York with the Statue of Liberty in the background and without circling Manhattan. You read their e-mail traffic, and their goal was not to have it over Manhattan, it was to have it over the Statue of Liberty.

The other thing that's interesting in this is, is that, look, this emanated from the civilians inside -- the pilot of Air Force One recommends the mission, but it is the civilians -- Louis Caldera, who's now gone, who was the political appointee to head the military office -- which I was shocked at. President Bush had military people head the military office. And then they had this guy George Mulligan, who has apparently got his name all over this e-mail traffic -- I don't know if he's still at the office or not, but he is the guy who's letting everybody know with a lot of enthusiasm that they're about ready to pull off this mission.

VAN SUSTEREN: And you know what upsets me the most, though, is that not only the $300,000, but the president promised transparency. Made us fight for these pictures, made us spend money, made the military spend money, and he could have just hitting a button and uploaded it, like I upload the Gretawire. And instead, we fought it and had to fight it to get it, thinking, you know, they must be hiding something.

ROVE: And mulligan was bragging about how they were going to have these fantastic photographs and be able to widely distribute them and people were already lining up in the e-mail traffic in order to make certain they got copies of them.

VAN SUSTEREN: Yes. Well, transparency, money, the whole works. Anyway, Karl, as always, thank you, sir.

ROVE: Thank you. You bet. Thank you.


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