This is a rush transcript from "The Journal Editorial Report," October 31, 2009. This copy may not be in its final form and may be updated.

PAUL GIGOT, HOST: This week on the "Journal Editorial Report," it's back: The House and Senate both roll out health care plans with a public option, as dissident doctors make plans of their own. Is a revolt brewing against the Democrat's friends at AMA?

And the spin is already starting. So just how nervous is the White House about Tuesday's governor's elections.

Plus, as college costs continue to soar, is a three-year degree the answer?

Welcome to the "Journal Editorial Report," I'm Paul Gigot.

The public option came back this week with a vengeance, with both Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi unveiling plans that include some form of a government-run health insurance program. It's a sore spot for many physicians, who argue that the government's involvement diminishes the quality of care they can give their patients.

The American Medical Association irked many of its members earlier this year by endorsing a plan by House Democrats that included a public option. And next weekend, a dissident group of doctors plans to try to force the AMA to drop its support for the health care overhaul. They're introducing a resolution at the AMA's semi-annual meeting that calls the legislation crafted so far, quote, "anathema to doctors and patients."

Dr. Donald Palmisano was the president of the AMA from 2003 to 2004. He's a spokesman now for the Coalition to Protect Patients' Rights, a group of more than 10,000 physicians.

Dr. Palmisano, welcome, thanks for being here.

DR. DONALD PALMISANO, FORMER AMA PRESIDENT & SPOKESMAN, COALITION TO PROTECT PATIENTS' RIGHTS: A pleasure to be on your show, Paul, thank you.

GIGOT: Now you've got the House and Senate bills introduced this week. Should they pass?

PALMISANO: No, they should not pass in their present form. Physicians, certainly the physicians that I work with, want to see health system reform. They want to put the patient in control, the right to buy across state lines, the right to own insurance.

GIGOT: Buy insurance across state lines, yeah.

PALMISANO: They don't want more government involvement. In fact, the AMA policy — I'm not speaking for the AMA, but I was there for many years when the policy was passed. It says that there will be no further government involvement in the practice of medicine. and the goal is for people to own their own policy. The goal is for people to get tax credits and for people to be the decision maker with the physician as trusted advisor. These bills do not do that. They increase taxes in the long run and they decrease availability of care for patients.

GIGOT: I want to get to the AMA later, but this public option idea is really — is described by the people who are for it as Medicare for all or Medicaid for all. Why do some doctors have a problem with Medicare? It gets down to the question of reimbursements, does it not, for charging less, paying less, than the actual service costs?

PALMISANO: Yes. Well, first off, governments should not be in the business of price fixing. Whenever you have price fixing, what you get from recorded history is decreased availability of the product or the service.

GIGOT: That's the way Medicare works.

PALMISANO: Yes, that's the way Medicare works. But it wasn't that way in the beginning, in 1965. I make that point in my book on leadership. In 1801 — section 1801 says no federal interference in the practice of medicine. And then later, the government said, oh, well, that's where we started, but we soon have to change. So physicians don't have a lot of confidence that what passes in these giant bills will be followed. In fact, they're concerned that some things will be followed that will destroy liberty. and the second thing is that the things that look goodwill be removed from the bill later.

GIGOT: So you don't think — you think that if this passes, those price controls that are now part of Medicare will spread throughout the insurance system and the practice of medicine. Do you think that is going to actually affect the quality of care?

PALMISANO: Absolutely. It doesn't matter if you have insurance, if you can't find a doctor in your hour of need. Everybody can have a Medicaid card. What good is it if there's no longer a neurosurgeon in your community? What do you do if you have a patient with a Medicaid card, and a physician that treats Medicaid patients, but can no longer stay in practice because the cost of delivering the service is more than the money received? So you lose those individuals and you end up with long lines and rationing.

We have examples, Great Britain, we have Canada. Just got back from Australia where I lectured on my book. And in Australia, the government is giving a subsidy to people to buy private insurance, 30 percent subsidy, and people can pay the difference, the gap. We could fix the problem, but government messes it up even more by saying, patients and physicians have the right to contract.

GIGOT: If I want to — if you take Medicare patients and I want you to do my surgery and they're only paying 80 percent — Medicare's only reimbursing you 80 percent of what it costs. And I say, you know what, I want you to do it. I'll pay 110 percent. You take the patient.

PALMISANO: I can't do it unless — I can probably contract and that's where they come up with this, saying, oh, you can probably contract. You can, but you're kicked out of Medicare for two years.

GIGOT: For two whole years. And you can't take any other Medicare patients.

PALMISANO: That's right. And you, the patient, you're not allowed to receive any money from the government for that particular service. I call that coercion. I call that something that's akin to un-American actually.

GIGOT: It interferes with my choice to be able to choose the physician that I want.

PALMISANO: Absolutely. The hallmark of the free enterprise system is the right to private contract. And they destroy that in these bills.

GIGOT: Let's talk to AMA and your former colleagues there. They support this. They say, we've done a deal with Congress that's going to get back a higher reimbursement rate. What do you think of that deal?

PALMISANO: Well, certainly, I came out early on and told the AMA I think that was a serious mistake. I think the AMA is a wonderful organization, it does much good. and I like the people who are in the leadership of the AMA, but they made a mistake. Anybody can make a mistake. But when you make a mistake, what you ought to do is acknowledge you made a mistake and you ought to say, what can I do to fix it? One thing they can do is remove their endorsement. They say it's not an endorsement, it's a support. Let's not get into Humpty-Dumpty type language. The words mean whatever I want it to mean when I say it. That's what the government does. Now we have Speaker Pelosi calling this the consumer choice or some other name. The name changes every week. Why do that? What it is, the government plan, with coercion and taxes, and it removes the choice from the patient.

GIGOT: But the AMA would say, look, you want higher reimbursements, we've got them for you. That's what we've negotiated. Isn't this good for doctors, particularly primary care physicians?

PALMISANO: Paul, if you and I are in negotiations, I don't want to let you set — I don't want you to frame the argument because I'm going to lose. So the government says, we have you in a small cell and we have shackles on you. So here is the deal, we're going to give you some money and we're going to get rid of this horrible price-fixing formula, jargon, sustainable growth rate formula, connected to the, you know, the gross domestic project. All of that jargon. What it means is they price fix. Now what we're going to do is we're going to wipe out the debt. We should cut you 20 percent now, and a little later, you'll be up to a 40 percent cut. What we're going to do is change it to another formula. The premise is wrong. You don't have, you government, my government, do not have the right to set my fees.

GIGOT: Right.

PALMISANO: You see, in other words...

GIGOT: You think that the AMA is kidding themselves and they may cut a deal now, but five years down the road, six years, whatever, the politicians come back and say, we're going to cut it anyway. Is that what you're saying?

PALMISANO: It's going to end up as a loss for the patients and the physicians. What AMA needs to say is, look, whatever you do, first of all, we want to take care of the patients, would allow us to probably contract with the patients. and don't forget medical liability reform. When I was president of the AMA, it was our number-one priority. and private contracting is among our highest priorities. The public option, the government option, is really a government takeover of medicine. It will destroy medicine. You could write a bill with about ten pages. Buy across state lines. Allow people to own their own insurance. Encourage health savings accounts. Those things are going to be destroyed with these bills.

GIGOT: All right, Dr. Palmisano, thanks so much for many here.

PALMISANO: Thank you.

GIGOT: Still ahead, a nervous White House gears up for Tuesday's elections, but has the spin already started? What the governor's races in New Jersey and Virginia will tell us about President Obama's first year and the future of the Democratic agenda, when we come back.

(COMMERCIAL BREAK)

GIGOT: Well, nobody will be watching election returns on Tuesday night with more interest than the president, who has a lot riding on the outcomes of two governor's races. With Democrat Deeds running behind his Republican rival in Virginia, the White House's best bet now seems to be in New Jersey where the latest polls have Democratic incumbent Governor Jon Corzine pulling evening with Republican challenger Chris Christie. The two contests are seen by many as a referendum on the president's first year in office, as well as an important indicator of the Democrat's chances of passing a liberal domestic agenda, not to mention winning in next year's congressional midterms.

The "Wall Street Journal's Dan Henninger, Jason Riley and Steve Moore, have all been following the races and they join me now.

Jason, a referendum on President Obama or not?

JASON RILEY, EDITORIAL BOARD MEMBER: Well, these are all places he won pretty handily a year ago, 57 percent of the vote in New Jersey, 53 percent in Virginia. So, yes, I think it's a fair test of whether the Democratic majority he ushered in is sustainable. But it's also a test of whether Republicans can regain some ground that they've lost in places like Virginia. We know Obama's policies are unpopular, but whether that can be converted into a victory at the polls is another story.

GIGOT: But, Steve, the White House is saying that, in fact, the Democratic candidate in Virginia ignored their advice. He didn't bring in the president soon enough. He didn't mobilize African-American voters. So there's really nothing to do with the president.

STEVE MOORE, SENIOR ECONOMICS WRITER: Well, I think that's exactly wrong, Paul. I think you've got to put these two races in a historical context. You remember back in 1993, during Bill Clinton's first year of his presidency? What happened in the Virginia and New Jersey governor's races is that the Republicans won both of those. And you remember, Paul. You were back in Washington back then. Once those races went over to the Republican column, after that, the next year, Bill Clinton was not able to pass a single piece of his domestic agenda and he was stymied. The Obama administration has to be nervous about the races. If they lose both of them, I think it really puts them behind the eight-ball on both health care reform and cap-and-trade.

GIGOT: The converse of that, is if they win one of them, if Corzine pulls out a victory in New Jersey, oh, well, ho-hum, we can move full speed ahead?

MOORE: Yeah, that's right.

DAN HENNINGER, COLUMNIST: Well, yeah, and they should say that, same with New York 23. I mean, it's like ballot...

GIGOT: Congressional district upstate where there's a special election?

HENNINGER: I think there's a lot at stake here, Paul. You remember, at the end of the presidential election, the press, the media, everyone was talking about the Obama ascendancy, the Democratic Party had found a figure which they could ride far into the future. Who was that figure? Smart, charismatic and a man of the middle, that was the popular conception. In the ten months that he's governed, he's proven himself to be solidly a liberal. And I think if these losses occur, it's going to question the basis of the Obama ascendancy. It's going to be very difficult for them to go forward on that basis.

GIGOT: Jason, you've paid particular attention to New Jersey. And the Republican trying to make taxes an issue, Chris Christie has, but without a specific plan. And that's allowed an Independent to come in and carve out votes because he's been saying I'll cut property taxes and — the Independent Chris Daggett has — and I'll raise sales taxes.

RILEY: Even if Christie does pulled out a victory, he really hasn't done himself any favors by running a vague campaign in terms of what he wants to do. He's going to be facing a Democratic legislature in Trenton.

GIGOT: Probably.

RILEY: And he won't have a mandate. How can you claim to be elected to do something when you've been unspecific about what you plan to do? It's been a very bizarre campaign strategy and it's left an opening for this Independent candidate, Chris Daggett, to come in and force Christie to compete for a Republican vote. So Corzine's strategy right now is to divide and conquer.

GIGOT: And get Democratic base out, which in New Jersey could be from 38 to 42 percent.

Steve, you've been covering Virginia. Have taxes played a big role in that race because Democratic governors there ruled for eight years and raised taxes a couple of times.

MOORE: Yes, taxes have been an issue. But really, the big issue, Paul, has been Obama. Despite the fact the administration said it's not about Obama. If you watched the TV, especially on the Republican side of the aisle, what Bob McDonnell has been talking about over and over again is basically this is a referendum on things like cap-and-trade legislation, on the health care. And in fact, Creigh Deeds has had to retreat from those policies because they're very unpopular. And this is one of the states, Virginia, that was a solidly red state in the '80s and 90's that's turned purple. It's one of those battleground states for the next decade, I believe.

GIGOT: So you're saying that if the Republicans win, that will have demonstrated that, in fact, Virginia is not going the way of a Pennsylvania or an Illinois and become more solidly Democratic?

MOORE: I think — I think it will be that indication. By the way, there's one really interesting district up in the western part of the state that's been Democratic for 50 years. It went for Walter Mondale and Michael Dukakis. And it looks like the Republican is going to win there in the assembly race. The reason that's significant, the number-one issue in that district has been cap-and-trade where people don't — those are coal mining, unionized workers who don't want cap-and-trade.

GIGOT: Dan, the Virginia race is, I think, pretty significant, when it comes to the cap-and-trade agenda and health care. Will the Democrats really not pass health care if they lose all these races?

HENNINGER: Oh, no, I think they've got to pass health care. They'd be done if they didn't do that. Look, this is a very dangerous moment for the Obama presidency. This is not 2010. This is less than a year into his presidency. If he loses these races, the members of his party are going to start looking to their own interests. and it's going to be, I think, difficult for him to govern going forward, but they'll pass that health care bill.

GIGOT: And their bloody-minded about health care, I agree.

When we come back, the topic on every parent's mind, the skyrocketing cost of a college education. What's behind last year's steep tuition increases? And is a three-year degree the answer?

(COMMERCIAL BREAK)

GIGOT: It's a trend that most parents are keeping an anxious eye on, the skyrocketing cost of a college education. According to a new report by the College Board, those costs continued to rise last year despite a 2.1 percent decline in the consumer price index. Hit hard by state budget cuts, four-year public colleges raised tuition and fees by an average of 6.5 percent while prices at private colleges rose 4.4 percent. Add room and board and the average cost of attendance at a public four-year college is now more than $15,000 a year. At private colleges, the price tag is $35,000.

The sticker shock has led some, including Tennessee Senator and former education secretary, Lamar Alexander, to push for a three-year degree program at the college level.

We're back with Dan Henninger and Steve Moore. And also joining us, the Wall Street's deputy Taste Page editor, Naomi Schaefer Riley.

Why do cost levels rise even if the price doesn't for everyone else?

NAOMI SCHAEFER RILEY, DEPUTY TASTE PAGE EDITOR: It's a third-party payer system. Basically, what you have is colleges know they can keep raising the price and they know that the government, through financial aid programs and various grants that they give to universities both public and private, is basically going to pick up the difference. Unfortunately, for middle class parents, it doesn't always work out that way. They're not picking up all the difference for them, but colleges keep raising the sticker price.

GIGOT: Because there's income limits on who gets the subsidies, but the subsidies are vast and the Pell Grants, direct grants for people. They're based with these subsidized loans and then there are subsidies for savings for school too, which is how a lot of middle class parents help. Are you saying there's a kind of chasing-your-tail quality here? The tuition goes up, subsidies follow and then the people say, tuition can go up again, and then subsidies have to go up again?

SCHAEFER RILEY: That's true. In addition, you also get an arms race among the colleges. I mean, you get a situation where, first of all, it turns out that parents think the college is better if they raise price. So if you see a $50,000 cost on college tuition, which by the way, happened this year.

GIGOT: Where is that?

SCHAEFER RILEY: Middlebury College. It costs $50,000 for tuition, room and board.

GIGOT: In Vermont.

SCHAEFER RILEY: Yes, this year. Vermont, a very high-cost-of-living state.

(LAUGHTER)

And you know, but parents see that sticker price and assume that must be a great college education. So it's — all the wrong incentives are in place and colleges are spending money on things like landscaping and fancy food programs and Wi-Fi in the bathrooms.

(LAUGHTER)

SCHAEFER RILEY: It's really hard to figure out where the quality is.

GIGOT: I have a hard time imagining. I barely use a P.C., Dan.

HENNINGER: It's going to get worse. The College Board just reported private loans last year for college dropped by 50 percent while the public federally subsidized loans rose 15 percent. Now, we also know that the Congress has taken — is going to disadvantage the private loan program, which means that the federal program is...

GIGOT: They're going to put it out of business.

(LAUGHTER)

HENNINGER: They're going to put it out of business, right, which means that basically colleges are going to become a wholly owned subsidiary of the federal government. You'll never get counter veiling price pressure under those circumstances.

GIGOT: Steve, is this going to lead to you want to go send your kids to college for only three years?

MOORE: Well, you know, Paul, I have an 18 and 16-year-old.

(LAUGHTER)

I'm listening to these prices that Naomi is talking about and I'm going to need a big fat pay raise.

(LAUGHTER)

My kids are going to be with me another four years, which is a nightmare.

Look, this is a real issue. It's going to cost now $200,000 to put a kid through college. You have to start asking yourself the question, look, I'll give you a $200,000 check. Maybe that's a better way to start your life than going to college. But Naomi put her finger on the problem. The two areas — I was looking at inflation rates in health care and education, both of those have booming costs. Education costs have gone triple the rate of inflation over the last decade. And it's because the people that are getting the service aren't the ones who are paying for it and that leads to exploding costs.

GIGOT: Naomi?

SCHAEFER RILEY: I want to say something about the three-year college cost. It's funny, if you go back to the 1970's, which we've been thinking about a lot lately. A lot of colleges actually reduced the length of their semesters, and they said this was to save costs for parents. But, of course, the semesters stayed shorter so kids got less education overall. And the prices never went down. So I think you also have to take these big ideas from schools about saving you money with a grain of satellite.

GIGOT: The likelihood is that they would find a way to charge the same amount anyway, even if you only went for three years.

SCHAEFER RILEY: Exactly. That's exactly right.

(LAUGHTER)

HENNINGER: But you get out work earlier and start to work and pay back those loans.

(LAUGHTER)

GIGOT: That would be the benefit. It's an opportunity cost, would be lower.

But, Dan, the government is going to — isn't going to change any of this. If anything, they're increasing the subsidies. they want to make Pell Grants an entitlement. Right now, it has to be passed with annual appropriation. They want to make it automatic.

HENNINGER: Yeah, and, know, there is a social aspect of this as well. It's pretty well proven that the payoff to a college education is higher lifetime earnings. The demand for college now is tremendous. People are just going to these colleges. Probably what we need is probably online colleges or more colleges to meet the supply.

GIGOT: But which college doesn't necessarily help, does it?

SCHAEFER RILEY: No, no. There are a lot of studies that show, if you're a person who got into both Harvard and, say, the University of Arkansas, and you chose the University of Arkansas, your lifetime earnings would not be that much different. One solution is improving K-through-12 education.

GIGOT: That would help enormously. And you might get higher returns on people who don't go to college or go to community colleges.

SCHAEFER RILEY: Yeah, the way it used to be.

GIGOT: We have to take one more break. When we come back, our "Hits and Misses" of the week.

(COMMERCIAL BREAK)

GIGOT: Time now for our "Hits and Misses" of the week.

Dan, first to you.

HENNINGER: Paul, I'm giving a hit to pay czar, Kenneth Feinberg, who incredibly told Congress this week that he did not want more authority over the pay of the seven firms that he's responsible for. Congress reacted as though a space alien had landed among them. We are going to give you more authority and you don't want it? No, he didn't. In fact, I think we ought to establish the annual Feinberg award for a federal official who displays uncommon modesty in doing the people's business.

GIGOT: That will be a one-year prize.

All right, Naomi?

SCHAEFER RILEY: I'm going to give a hit to the Disney Company that decided to give refunds to parents this week who purchased the Baby Einstein videos. These were supposed to, of course, turn your kids into geniuses by having 2-year-olds watch Mozart and all sorts of other shapes run across the screen. And it turns out that it didn't work. and so, you know, they're nicely kind of giving a refund. Of course, it turns out that the average television watching for the 2 to 5-year-olds that came out this week was for 32 hours a week, which I thought was...

GIGOT: Oh.

SCHAEFER RILEY: So who knows what Baby Einstein will do?

GIGOT: All right.

Jason?

RILEY: This is a hit for charter schools. A new study by the Manhattan Institute finds the charter schools benefit even those kids that don't attend them because they've put competitive pressure on surrounding public schools to improve. So it turns out that competition works on public education after all. And I think opponents of school choice are running out of excuses, Paul.

GIGOT: To keep spreading — to stop the spread of charter schools.

RILEY: Charter schools, yes.

GIGOT: And the problem with Feinberg, Congress wants him to have more power because they want to give him more. But they don't want to take anymore responsibility.

HENNINGER: That's right, but he's pushing back. God bless him.

GIGOT: All right, thanks.

Remember, if you have your own "Hit or Miss," please send it to us at JER@foxnews.com .

That's it for the "Journal Editorial Report." Thanks to my panel and to all of you for watching.

I'm Paul Gigot. We hope to see you right here next week.

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