Ms Sanderson, who has been in cabinet for just nine months, replaces deputy premier Roger Cook in the critical health and mental health portfolios.
It comes after a bruising year for Mr Cook, who has served as either health minister or shadow health minister for the past 13 years.
The 56-year-old adds tourism and commerce to his state development, jobs and trade and science portfolios, in a move that primes him as Mr McGowan's likely successor.
Mr Cook has come under fire over staffing and performance issues at WA's public hospitals but the premier insisted his deputy had not lost the public's confidence, saluting his "extraordinary achievements" in managing the pandemic.
"I think 13 years in one portfolio is long enough and health is very, very gruelling. It's a massive portfolio," Mr McGowan told reporters on Friday.
"I think it's good that Roger gets new opportunities and new challenges. Having the deputy premier with a major economic portfolio which deals with a whole range of areas ... I think is a natural alignment."
Ms Sanderson steps into the significant health portfolio after serving as environment and climate change minister since the Labor government's re-election in March. She had previously been a parliamentary secretary.
Among her achievements in the government's first term was leading the introduction of WA's voluntary assisted dying laws.
It comes as WA prepares for the reintroduction of COVID-19 to the community when the state reopens its borders on February 5.
"She's a very capable and talented person and very focused," Mr McGowan said.
"She's been in parliament now for over eight years ... she managed the VAD process which was quite an extraordinary effort.
"I think it's entirely fair and reasonable, particularly as we have announced our (border) transition plan, we've handled COVID so well over the course of the last two years ... that we get a new minister now."
Having leveraged his extraordinary personal popularity to lead Labor to consecutive crushing election victories, Mr McGowan's dominance of the party remains virtually unprecedented.
The premier replaced the retiring Ben Wyatt as treasurer after the March election, a dual position he has no plans to relinquish.
"I quite like being the treasurer and I find it coordinates well with being the premier," he said, adding that his Liberal predecessor Colin Barnett had also held both roles.
"I'm really energised and happy to keep going."
Mr McGowan said a push by Liberal premiers in NSW, South Australia and Tasmania for changes to the GST distribution deal had cemented his decision.
"They obviously need to be confronted," he said.
"The fact I go to national cabinet, the fact I go to the treasurers' meetings, I think adds a bit of weight to dealing with that issue that some of the other premiers are putting forward."
Reece Whitby takes over as environment and climate change minister, while Stephen Dawson becomes minister for emergency services.
Tony Buti will oversee the implementation of contentious new Aboriginal cultural heritage laws, becoming the state's third Aboriginal Affairs minister in the space of a year.
No ministers were replaced in cabinet under the reshuffle.
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