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Wall Street sees the chances of the U.S. shifting to a government-run health-care system as incredibly slim. But unpredictable politics over the last three years has investors worried and punishing health-care stocks all the same.
Health care is the worst-performing sector in the S&P 500 this year as Sen. Bernie Sanders, I-Vt., and other Democratic presidential hopefuls push "Medicare for All," a plan to replace private health insurance with public coverage, as part of their 2020 campaigns.
While it's a long shot, President Donald Trump's unexpected election and the U.K.'s surprise support for Brexit in 2016 make investors worry that Sanders could actually win and some sort of universal health-care plan could pass, say market analysts, including Ross Munken at Evercore ISI.
The Health Care Select Sector SPDR Fund, an ETF that tracks the health-care industry's biggest companies, has risen by 4.2% year to date as of Friday, significantly lagging the S&P 500's 17% rally.
Switching to publicly run health care would be "massive. Even if its chances are 1% or 2%, the market is being overly cautious," said Munken, who said he doesn't expect the U.S. to transition to "Medicare for All" any time soon.
A number of Democratic proposals call for eliminating private health insurance and replacing it with a universal Medicare plan, saying it would help reduce administrative inefficiencies and costs in the U.S. health-care system. Most recently, Sanders unveiled a bill that would create a government-run system to provide health insurance for all Americans.
Along with former Vice President Joe Biden, Sanders is a favorite among Democratic primary voters, early polls show. Sanders also led the crowded Democratic 2020 field in fundraising during the first quarter with $18 million.
Actually implementing Medicare for All would be tough even if Sanders won, said Ana Gupte, a senior health-care services analyst at SVB Leerink. Democrats would need to hold on to their edge in the U.S. House and win at least three new Senate seats in the 2020 election to regain control of Congress. Then they would likely need 60 votes in the Senate and two-thirds of the House to overcome any potential filibusters.
"Investors realize this but view the headline risk as an issue til at least the primary is won by a moderate such as Joe Biden," Gupte said.
Trump's presidency, however, has been marked by a series of unprecedented actions, historical compromises and conflicts that have often shocked the markets. Trump caught investors off guard again Sunday after he said that the U.S. will hike tariffs on goods imported from China, despite repeated claims in recent weeks that trade talks with Beijing were going well.
Investors are "twitchy," said Jeff Goldsmith, a national advisor for Navigant Consulting.
"The chances of Medicare for All without a Democrat in the office is zero. The chances with a Democrat in office where the Dems have less than 60 Senate votes is maybe 5%," he said.
The possibility has CEOs of major health-care companies worried too.
Last week, CVS Health CEO Larry Merlo and Humana CEO Bruce Broussard spoke out on the legislation. Merlo said attention around "access to affordable quality health care" is an "important discussion" and that CVS will continue to be "an active participant" in the debate. Broussard said he wouldn't back the legislation and that it could end up harming the U.S. rather than helping.
The sharpest rebuke came from UnitedHealth Group CEO David Wichmann, who said last month that "Medicare for All" would "surely destabilize" the U.S. health system.
Munken of Evercore said there is a sentiment in the industry that lawmakers in Washington are going to address the issues of high health-care costs in the U.S. and change coverage in some way, even if it's not as radical as "Medicare for All."
"We will certainly have winners and losers" in the health industry, Munken said.
For more on investing in health-care innovation, click here to join CNBC at our Healthy Returns Summit in New York City on May 21.