This is a rush transcript from "Special Report," June 2, 2011. This copy may not be in its final form and may be updated.


JAY CARNEY, WHITE HOUSE PRESS SECRETARY: The agency involved here will work with Indiana and we expect them to come into compliance.

DR. DONALD BERWICK, MEDICARE/MEDICAID ADMINISTRATOR: Medicaid can't pay with federal dollars for abortion, but that doesn't mean the state can deny services from a willing provider. That's what the law is. And we're just implementing the law.

SUE SWAYZE, INDIANA RIGHT TO LIFE, LEGISLATIVE DIRECTOR: I think it's unfortunate we have presidential administration that's pushing a pro-abortion agenda, again, over the wishes of this particular state's legislature -- legislative branch.


BRET BAIER, ANCHOR: This is all about public funding for Planned Parenthood. Before the break we asked you, will Indiana be forced to reverse its ban on public funding for Planned Parenthood? Just 14 percent of you said yes, 86 percent said no in this unscientific poll.

You heard the Medicaid administrator, Donald Berwick suggest that a warning, perhaps to the state of Indiana would be good enough. The attorney general there has released a statement saying this -- quote -- "We are reviewing the CMS letter" - that's the Center for Medicare and Medicaid Services - "letter with our client FSSA to determine our client's options, but we will continue to defend the statute." I should say that is from the public information officer for the attorney general in Indiana.

We're back with the panel. The battle here is over, Charles, Mitch Daniels signing this law that was passed by the legislature and whether the federal government can step in and say, no you have to provide this funding.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: Look, there is a policy issue here, of course. I agree with the spokesman for Indiana who said clearly the administration is trying to push a pro-abortion agenda. However, this issue hinges simply on the interpretation of the law. And the law, as everybody understands is that you can't use the funds, the Medicaid funds to pay for the provision of abortion. Everybody agrees.

The question is, if you have an outfit that does two things. Say it performs abortions and it cleans teeth. Everybody understands that you can't pay for the abortion, but can you subsidize with Medicaid money the teeth-cleaning operation?

As I understand the law as the way it's been interpreted up until now, the answer has been yes. So I think it's simply, we are a country of laws, this ought to be adjudicated in a court, have Indiana sue the Medicaid administration over this and see who is right, because whatever your views on abortion are, either it's allowed under Medicare or it's not. And let's let the judiciary decide.


A.B. STODDARD, ASSOCIATE EDITOR, THE HILL: Charles is right. I mean the system is either designed to prevent the use of federal funds spent on abortion services or not. And ya know, it's, you elect pro-life lawmakers and you pass these kind of laws to defund Planned Parenthood or prevent any kind of federal dollars being spent on abortion. That's understandable.

But in a state politically, it is going to be -- it is gonna be a problem. These are federal funds. And if the federal government can deny $4 billion in Medicaid funding to the state of Indiana I think going into their third year of nearly 10 percent unemployment, that is a lot to gamble with, to put nearly $4 billion in Medicaid funding at risk to that state.

So if, you know, so far, all the states have been brought into compliance who've threatened to do something like this. And no state has yet been penalized. I don't know, ya know, where this is gonna play out. But I think politically it's tough to put that much Medicaid funding at risk.

BAIER: Steve?

STEVE HAYES, SENIOR WRITER, THE WEEKLY STANDARD: Well, if the Indiana attorney general hasn't laid out his case or his response yet, several Indiana legislators, the other day did, in a letter that they sent to Kathleen Sebelius. They laid out their argument.

And their argument's basically two parts. One, the Medicaid Act says it's all about who has the authority. In addition to other authority, a state may exclude an individual or an entity -- in this case it would be Planned Parenthood -- for any reason that the secretary can exclude this entity from receiving Medicaid funds.

Then there is a 1991 Supreme Court case Russ vs. Sullivan which gives that authority to the secretary. Therefore, if the secretary has the authority, the state has the authority, according to the language in the Medicaid Act. That's the way that the legislators outlined their argument in this letter to Sebelius the other day. I expect that if Indiana decides to challenge this, that's the same way that the Indiana attorney general will make his argument.

BAIER: And what about the politics of this? Ya know, Mitch Daniels signed this law and there was a lot of talk that he might be running for president. Now he is not running for president. He is not going to be running for governor again. He is term-limited there. Ya know, I mean where is the politics?

HAYES: Well, I don't know that there are going to be politics on, ya know, on 2012 politics or presidential politics on this, in Indiana. But I think it's very interesting because it seems to me that if the administration is willing to make this case now, on Indiana and Planned Parenthood, doesn't this suggest that they're gonna be willing to make this case about Obamacare down the road, that they're gonna choose to require states or other entities to have Planned Parenthood included in their coverage? And if that is the case, I think they're gonna get a huge fight from Republicans.

KRAUTHAMMER: Look if the states had a strong claim on this, it's hard to understand why 12 of the states who attempted this have caved and agreed to a compromise so that the federal funds would flow. But secondly, it shows how --

BAIER: Because maybe they were worried about the Medicaid funds.

KRAUTHAMMER: They were worried about losing all the funds, and they might lose in court. Because traditionally, I think, the interpretation has been up until now the position of the administration. But secondly, it shows how corrupting these programs with the states and the federal government are. It essentially wipes out the federalism. It makes a state the vassal of the federal government because all the money is coming in. And if the government is funding you, if Washington is funding you, it owns you.

BAIER: That is it for panel. But stay tuned to see what could be another agency lowering standards.

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