This is a rush transcript from "Hannity," August 26, 2009. This copy may not be in its final form and may be updated.

SEAN HANNITY, HOST: The president is now well into his vacation on Martha's Vineyard but Americans across the country, they do not have the same luxury. They are getting no vacation from their worries about the future of their health care plans.

Now they continue to worry about whether a government takeover would limit their ability to make choices for themselves and their families. Now Arizona Senator John McCain heard from many of these Americans at a town hall event yesterday in Sun City, Arizona. And here's what he told the crowd.


SEN. JOHN MCCAIN, R-ARIZ.: I want to reform health care. I want to reform health care. The costs are out of control. They are double-digit inflation. But —


But let's not forget, the quality of health care is what must be preserved in America as well.


HANNITY: And Senator McCain is gearing up for another town hall even tonight in Phoenix and he joins us now.

Senator, good to see you. Thanks for being here.

MCCAIN: Thanks for having me on, Sean, again.

Video: Watch Sean's interview

HANNITY: And by the way, I didn't see a lot of contentiousness, I didn't see a lot of anger, I didn't see a mob there, but I do understand, having spoken to you earlier, that apparently the e-mails have gone out. You expect a pretty heated exchange tonight from the MoveOn crowd?

MCCAIN: I do, but I also think the majority of people would want a respectful exchange. The essence of a town hall is to listen to people's views and have them listen to yours and your responses. So I hope it's be respectful but if not, my friend, I've had over 1,000 of them so I think I can handle it.

HANNITY: I think you've been through a lot in life. I think you can handle it, Senator. You know, one of the things, and I got a chance to speak to you just before coming on the air, we were talking about this. You know, if — for example, if we're to look at ratings in television and radio, these are election-year numbers.

I have been on radio since 1986, I don't ever think I've seen passion like this. We've been on the FOX News Channel since we started in 1996.

Senator, have you seen passion like this from the citizenry speaking out this way before?

MCCAIN: Never. There is a peaceful revolution taking place. I want it to stay peaceful but there is a grassroots uprising the likes of which I have never seen. There's anger, there's concern about the future. There's concern about the generational theft that we've committed by running up unconscionable and unsustainable deficits.

And there's great concern — let me just give you a small example. A young woman at the town hall meeting yesterday said, Senator McCain, I am worried about my freedom. And what she was talking about was her right to choose what kind of health care she wants, what kind of — what physician she wants to see, when she can see a doctor and — physician and when she can't. That is — she epitomizes, in many respects, the deep and abiding concern out here and a revolt against a government-run health system.

HANNITY: What do you think about the fact that Democrats are basically and virtually in hiding, Senator? They're not holding these town halls. They seem afraid to face, you know, stay-at-home moms, veterans and the elderly.

Why do you think they're so fearful of having the town halls you're holding?

MCCAIN: Well, I think the first in the first step of the 12-step process, I think they're in denial that Americans are upset and concerned. I don't think they appreciate yet the depth of the passion that's out there. They dismissed the tea parties, they dismissed your freedom rallies, they dismissed the real, vocal opposition to this health care plan.

And — but I don't think they're going to be able to dismiss it for too much longer.

HANNITY: Senator, your running mate, Governor Sarah Palin, came out with a very hard-hitting posting on Facebook, which I agreed with especially in light of what we've seen in Great Britain and Canada and elsewhere.

And then we had the Obama administration that brought back this book that the Bush administration had gotten rid of, "Your Life, Your Choices." They go through a series of scenarios with veterans at VA hospitals and nursing homes, which basically says, well, you know, you don't want to be a burden to society, to your family.

Is that the kind of death panel that maybe people were afraid of when they read pages 425 to 430 of the House bill?

MCCAIN: Yes, but I think they're also concerned because they're well read, they're well informed, they're knowledgeable. They know what's happening in other countries where basically there is a rationing of health care particularly when people reach a certain age as to what kind of treatment they can and if they can get it.

The incredible delays in acquiring that kind of care, so I think it's and not just that, I think it's the example of government-run health care in other countries which is not — America is not ready for that.

HANNITY: What happens if Chuck Schumer and Senator Harry Reid in the U.S. Senate, as they have indicated that they're willing do, but what if they go forward and used the reconciliation process because they don't have enough Democratic senators on board for cloture and a filibuster-proof Senate? What happens then?

MCCAIN: I think it destroys, in many respects, the unique aspects of the institution in the Senate which is the 60-vote principle. You may recall that I fought hard for that principle in the nomination and confirmation of judges in the United States Senate. I was criticized by some at that time.

But the fact is that if they go this way in the so-called, quote, "reconciliation," I think that you will see a backlash in the United States Senate and across this country. The institution of the Senate works on the 60-vote basis in many occasions.

HANNITY: Have you had any discussions with the leadership? Have you talked to Chuck Schumer? Have you talked to Harry Reid about this? Is there any — because pretty much we keep hearing the Republicans have been left out of the process. There's been no discussion at all even with you?

MCCAIN: No, and I would point out that the legislation that has passed the House and the legislation that passed the committee that I am in, the health committee, was Democrat proposed and we tried to amend and every meaningful amendment was turned down.

It is not bipartisan nor has there been any significant or — actually, no bipartisan negotiations with the exception of three Republicans in the Finance Committee.

HANNITY: Senator, look, I would support, for example, for the 50 million chronically uninsured, I would support tax credits. I don't mind catastrophic care. I support of medical savings accounts. I believe in tort reform.

What are the things that specifically you would support if they ever did open the door for any Republican reconciliation or negotiations?

MCCAIN: Everything that you just said including expansion of health savings accounts. Including being able to go across state lines to purchase health insurance policies that you feel is best for yourself and your family. Including refundable tax credits so that people can go out and find the health insurance of their choice. Including incentives for wellness and fitness.

This is not a commercial, but Safeway has gotten famous because they reward their employees for wellness and fitness. They give them incentives to do — for all that kind of good behavior. And their health care costs have gone down.

Also we need outcome-based treatment. If you have a person with a certain chronic illness such as you talked about, treat them for a year, pay them a certain amount of money. If that patient is still well, give him a financial incentive for keeping that patient well.

That — those are a number of the things we can do. The system is going broke. By — in eight years, Medicare, according to the trust fund overseers, is going broke. So we need to reform it.


MCCAIN: And we need to fix it and we can do this through free-market incentives and other changes that we can make. We can do that but the answer is not a government-run health care system. And the public option isn't the right word. Government option.


MCCAIN: And maybe it's just not option.

HANNITY: Senator, we obviously heard the news, the loss of Senator Ted Kennedy. A colleague and friend of yours. I don't think there was anything I agreed on politically. I wish him and his family all the best. Your thoughts on Senator Kennedy?

MCCAIN: He was a good and decent man. He espoused his cause with passion and fervor and dedication. I could trust his word. He was a person that I could trust and he was also a lot of fun to be around. But he loved the institution and he reached across the aisle. And we need some more of that.

HANNITY: All right. Senator, always good to have you on. Thank you for being with us. Good luck at the town hall. By the way, tell those MoveOn.org-ers to be quiet tonight. Go after them, Senator.

MCCAIN: I'll tell them hello for you.

HANNITY: Oh they'll love that. That'll help you out a lot, Senator. Thanks for being with us.

— Watch "Hannity" weeknights at 9 p.m. ET!

Content and Programming Copyright 2009 FOX News Network, LLC. ALL RIGHTS RESERVED. Transcription Copyright 2009 CQ Transcriptions, LLC, which takes sole responsibility for the accuracy of the transcription. ALL RIGHTS RESERVED. No license is granted to the user of this material except for the user's personal or internal use and, in such case, only one copy may be printed, nor shall user use any material for commercial purposes or in any fashion that may infringe upon FOX News Network, LLC'S and CQ Transcriptions, LLC's copyrights or other proprietary rights or interests in the material. This is not a legal transcript for purposes of litigation.