However, the state is required to pay for at least two more operations and will continue to cover hormone treatment and psychotherapy for low-income people diagnosed with gender-identity disorders.
A state appeals board ordered Medicaid last month to pay for two people to travel out of state to undergo sex-change operations. Estimated cost: $50,000 to $60,000 each.
The Department of Social and Health Services, following a state audit and criticism from some legislators, wants to halt the practice in favor of cheaper and less controversial treatment.
"This is very controversial and in need of clarity," state Medicaid director Doug Porter told The Seattle Times. "We've decided to make it real crystal clear that it's not a covered service."
Instead of surgery, the state will offer other services, such as hormone treatment and psychotherapy, for those diagnosed with gender-identity disorders.
"We understand this is a very real condition for some people," Porter said. "We just think psychotherapy and hormone treatment is a better way to go."
Many transgender people and medical experts who treat gender-identity disorders disagree. In some cases, they argue, surgery is the only effective treatment.
"It's the only thing that repairs our mental health and makes us feel whole and able to get back on track," said "Lee," one of the two patients who won on appeal last month. She requested that her full name not be used.
Lee, 51, said she has been undergoing hormone treatment and living as a woman for the past six years. She is scheduled to undergo sex-change surgery this fall in Colorado.
Chris Daley, director of the California-based Transgender Law Center, said Washington's plan to remove sex-reassignment surgery from its list of covered services is "pure politics and bad public policy."
"We all understand the impulse to rein in costs, but there's no cost-benefit in denying necessary health care."
While the disorder has been recognized for more than two decades by the American Psychiatric Association, few government or private insurance programs pay for treatment.
Washington is one of a few states where sex-change surgeries have been covered. The number here has been small: six during the past 15 years.
Medicaid officials said the state has paid for two sex-change surgeries since 2000, at a total cost of about $113,000.
The issue caused an uproar earlier this year.
After the state auditor revealed the practice, Republican state legislators tried unsuccessfully to impose a ban. U.S. Sen. Charles Grassley, R-Iowa, wrote Gov. Chris Gregoire that he was asking for a federal investigation.
Even before the controversy, however, state Medicaid officials were working on rules to classify sex-reassignment surgery as "experimental" and not eligible for coverage.
A consultant's report commissioned two years ago concluded there is not enough evidence to show that surgery is any more effective than hormone treatment and psychotherapy.
"The evidence available to us today is that [surgery] is not medically necessary," Porter said.
Although the report has been criticized by some experts, the state began using it as grounds for denying requests from people seeking coverage for sex-change surgeries.
But the state has lost appeals in both recent cases. Both involve men seeking to become women. Both said they suffer from depression and are backed by medical professionals who say surgery would be best for them.
The judges noted that the surgery is covered under current Medicaid regulations.
The state has three more appeals pending. Since all three cases came after the state adopted new standards based on the consultant's report, Medicaid officials predict the state will prevail.
The state has begun rewriting the list of services covered under Medicaid. Porter said the state plans to remove surgery as a covered treatment for gender-identity disorder.