This is a rush transcript from "Hannity," July 28, 2009. This copy may not be in its final form and may be updated.

SEAN HANNITY, HOST: We are three days from the House's August recess and just eight days from the Senate's summer break, so the clock is ticking and Democrats have yet to produce the health care bill the President Obama has demanded so they are doing what all responsible adults would do — making excuses.

And that is our headline this Tuesday night, "Shifting the Blame." Now Politico.com reports that House Speaker Nancy Pelosi is blaming insurance companies for her failure to get a health care bill through the House. Apparently House majority whip Jim Clyburn, well, he didn't get that memo because he's blaming the whole fiasco on Republicans.

Now according to Clyburn, Republicans have perfected, quote, "just say no." Now that's interesting because Democrats enjoy such a powerful majority in Congress right now that they don't need the Republicans to pass this bill.

Now the truth is, it's Democrats themselves who are holding up this mess of a bill. They are the seven Blue Dog Democrats on the Energy and Commerce Committee and they've been wielding their power within the Democratic Party.

So why the Democrats? Why they're shifting the blame to Republicans?

Well, joining me now to answer this question is Arizona Senator John McCain.

Video: Watch Sean's interview

Senator, I — you know you would think that the Republicans won here, considering they're getting all the blame for all of this.


SENATOR JOHN MCCAIN, R-ARIZ.: You would think so. But I also would be a little careful about the Blue Dogs. Traditionally and historically they bark but they don't bite. And in the case of other bills such as climate change, the speaker peels off enough of them in order to win and gives the other ones a free pass so I'm not confident that the Blue Dogs will hold fast. In fact, I think it's very likely they cave.

HANNITY: Well, I think it's likely they cave. There's a couple of senators we keep reading about. Three Republicans and three Democrats. And they've gotten together in a room and that they pretty much have, quote, "worked out their differences." And they're talking about a co-op bill instead of a public option bill.

What do you know about it? And is this incrementalism in your mind?

MCCAIN: I think it's incrementalism. I just make a couple of points. We were not in the takeoff on the formulation of health care legislation in the health committee of which I am in and although we spent a lot of days working together, none of our real significant amendments such as medical malpractice reform were adopted.

But I don't know exactly what is going on among those six Republicans and Democrats, but I know that if they do away with the so-called government option that's not going to make a lot of the liberal Democrats very happy. So we'll have to wait and see.

Our message is, we Republicans want reform. We're for it but we also don't want to have a government takeover of the health care system, which is the foot in the door which would be led to, and second of all, we don't want any employer mandates.

HANNITY: Why would members of the Senate Finance Committee be negotiating sort of rogue like this and not consult with leaders like yourself? Does that bother you?

MCCAIN: Well, I think they are consulting with us. I understand that people are always in favor of negotiations to try to reach a solution. I just don't believe right now that a Democrat proposal as we understand it and where the negotiations are going to succeed because the Democrats have a fundamental belief that you have to change the entire health care system in America.

We are of the fundamental belief that the quality of health care in America is the best in the world and you've got to preserve it. In fact the problem is the affordability and availability, not the quality.

HANNITY: Well, look at what Democrats are talking about in terms of paying for this. The various taxes that they have at least thrown out there as a trial balloon. The latest ones are, you know, for example, plastic surgery, which by the way probably that's going to impact both you and me down the road — I'm only kidding. At least me for sure.

MCCAIN: Without a doubt.


HANNITY: They're talking about a soda tax, they're talking about taxing employer benefits, they're talking about a millionaire surcharge tax. But the bottom line is they're talking about significant tax increases when the economy is in a slowdown. What is your reaction to any of those tax increase proposals?

MCCAIN: Well, my reaction is this would be the worst time in recent history to raise anybody's taxes. But the point is that when they're talking about reform and reducing costs, then why do we have to increase taxes? Why do we have to increase revenues?

There's a fundamental contradiction there. We believe we can reduce the cost of health care by allowing people to go across state lines and purchase the health insurance that they need, by allowing small businesses to pool, by outcome-based treatment of the patient rather than paying for procedure by procedure. By medical malpractice reform.

We think — well, statistics are that about $100 billion a year are spent on defensive medicine by doctors because of their fear of lawsuits. And by the way, I'm sure most of you know that a neurosurgeon's malpractice insurance could be as high as $200,000 a year.


MCCAIN: Who pays for that? So.


MCCAIN: We think there are fundamental reforms that can be made to reduce the escalating costs of health care. That's the difference. The fundamental philosophical difference we have.

HANNITY: Well, and that's why I'd rather have more of those options on the table than less of what these private meetings might bring about.

Look, Senator, I am trying to tell anybody that will listen that this is going to be a disaster. Everything that I've heard so far, of monumental proportions. And it's not just Sean Hannity. It's the Congressional Budget Office. You know they're pointing out it's going to drive up health care costs by trillions. It's going to leave millions out of the system. It's going to force millions into the government system.

I think we have every reason to believe it results in rationing, it results in the government making decisions as they try to save money, including probably impacting the elderly the most. Is there any aspect of my analysis that's wrong or am I pretty much on target?

MCCAIN: One, you're on target. But two, one of the seminal moments I think occurred a couple of weeks ago and again last week when the Congressional Budget Office, which by the way is selected the head of by the Democrats, came out with a devastating assessment of the effects of health care plan that was before the Senate.

As you know it did not save money. It increased health care costs by over $200 and some billion a year. It did not provide universal coverage. And that was a devastating blow to what the president and the Democrats were trying to foist off on the American people as true reform.

Actually it was not reform and all it was going to do is increase costs to Americans.

HANNITY: Senator, during the campaign, you weren't one to take little old Sean Hannity's advice, not that I was offering it, but I — you're laughing — I felt the issue of Jeremiah Wright, Bill Ayers, the radical associations, I thought they were very important because I think it revealed a part of the president's character that I think needed deeper analysis.

The president weighed in on controversy of this Cambridge Police Department and this Professor Gates. And the president, without any knowledge, said they acted stupidly. And then he tried to turn this into, quote, "a teaching moment," and everybody needs to lower the volume.

Thomas Sowell had a great column today, basically, reaffirming that if you sat in that church for 20 years you probably would have that rush to judgment. In retrospect do you think that maybe it was more important than people thought, maybe you should have brought it up more?

MCCAIN: I don't — I think people were aware of that situation. It was very well publicized and very well covered.

Look, we were in the midst of an economic tsunami as you know. The stock market dropped 700 points in one day. I think most people's attention were on the economy and also the situation as regards to Iraq. And I believe we would succeed there. So I think those were the major issues. But I understand your point.

HANNITY: You know we've had — the president now has had, you know, six months to impact the economy. He said unemployment wouldn't go above 8 percent. Now it's 9.5 percent and headed to double digits. He's accumulated more debt than every other president combined before him.

When you look — and now his poll numbers are beginning to impact, you know, the decisions that he's making. How bad are these decisions for the economy? I mean if you were to assess it honestly six months in, how bad is this for the American people?

MCCAIN: I think the stimulus package was really a seminal moment. They picked off two, three Republicans, one of them is now a Democrat.


MCCAIN: And it was a huge, massive — a huge, massive expenditure and the money couldn't be spent right away. Right now there's only like 10 percent of the money and the predictions were that there would be unemployment a maximum of 8 percent.

This has raised the awareness and concern about what we're doing, this committing generational theft and robbing our children and grandchildren of an economic future. That's where I think a seminal moment was.

HANNITY: Yes. I think you coined the term generational theft. But I think you were dead on.

Senator, always good to see you. Thank you for being with us.

MCCAIN: Thanks for having me on.

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