I had a pretty indignant initial reaction when I first heard years ago about the SF city government paying for these.
But I do think it goes to the birth defect argument. Maybe it's not the same as being born with a cleft palate, but there is a sort of biological sense of disfigurement combined with the social construct of how everyone looks and interacts with that person. It can be debilitating.
15 years ago I had a coworker Tammy who became Travis. It was pretty weird at first - the bathroom thing and all. But over time I understood more.
So ethically, I'm not against insurance paying for gender reassignment surgeries anymore than I'm against repairing cleft palates. The question remains the cost-benefit in a society of limited resources. Not everybody should get a liver transplant, for example, and we suck at recognizing how this seems dehumanizing but there's a prohibitive cost on everything.
I think that's pretty much it. I don't know what my completely informed opinion is, as it's not completely informed. I think plenty of people have legitimate feelings of dissociation between their bodies and their minds, and if surgery is a treatment that can work for that, then do it.
Then there's the whole issue of gender being a man-made construct - what part of being a woman is it that you want? How and when do you know that you were supposed to have a penis? For many trans people I know, dressing the part, doing "lady" or "manly" things isn't often part of the equation, yet that's what we hear about in articles. Especially about "transgender" kids (something I am rarely convinced of, as the media shows "He always knew he liked dresses!" which is bullshit, anyone can like dresses, what about his feelings towards his body?)
I don't know. It's a very real thing, and I completely support the people who need to do it, but I can't imagine how they feel or even the thought of going through that kind of surgery.