That distinction can be found in facial transplant patients. And facial transplants are far more risky than GRS because the patient must take drugs to prevent rejection for the rest of their lives.
Some of these patients are blind and so you wonder what difference it really makes regarding their appearance, but others will have the surgery to help with eating or breathing. Those who are "only having it" to help with mental reasons are being too easily dismissed IMO. You only have one life, to go through it disfigured when there are medical solutions available is inhumane.
I'm not disagreeing with their decisions to undergo surgery, but I do think it's reasonable to separate out surgeries that are needed for mental health, with surgeries that are needed for physical function. Whether the former should be covered by insurance under the same grounds as the latter can be separately discussed; I wouldn't conflate the two.
I guess part of the issue for me is that a variety of mental conditions may make a variety of therapies necessary, and I'm not convinced all of these should be covered -- or at least I'm convinced that their coverage should be tackled separately from primary medical treatment. In another thread, a poster pointed out that his depression was alleviated by getting laid, and as I understand it some anxiety can be treated by relaxing activity (say, a camping trip) -- still, it is debatable as to whether these treatments should be seen as "medical treatments" as opposed to therapeutic treatments.
Partially because gender is a social construct, it is hard for me to see gender reassignment as more than a cosmetic procedure, whatever therapeutic function motivates the procedure.