J.H.
I don't really know what causes it or even what it is but I wanted to write to you as someone who had the same problem when I was a baby. They had to use a hormone cream on me for I think my Mom said like 6 months and then everything turned out okay, she said that the "lips" opened up slowly. I don't know what the surgery would entail but as scary as it is, it might be better then long term hormone treatment at such a young age.
One thing I would ask for is a second opinion on the surgery. My husband is in the Army and we have found out that sometimes the military healthcare system is a little operation happy. They like to get experience on operations that aren't routine since they don't come up as regularly for them as they might in the civilian world. If that makes any sense.
Good luck and let us know how it turns out.