So I replaced rotors and pads, and stops tons better. My point to all this, I have never seen brakes wear in this way. As a family we have/had several 2500 suburbans and have never seen this. We had a 1993, and currently have a 1997, 2- 1999's, and a 2001, and my 2004 2500 Avalanche, and none have had this issue.
So next time you rotate your tires, and check your pads, make sure to really inspect both sides of the rotor as well. I had been checking the pads through the hole in the caliper, and they were worn but had life left. Its a task to see between the dust shield and the inner rotor, but worth it.
My only guess, is that the previous owner in Central VA, used the vehicle in the winter and was subject to road salt, and the dust shields prevent the salt from being washed away form road spray or car wash, and caused the excessive rust on the inner side of the rotor. Typically the pads clean any rust off the rotors, but I guess the rust was so severe, that it just eroded the pads instead.
Here is the new stuff. I wanted to upgrade to drilled and slotted, but didn't want to wait a week for the Rock Auto parts to arrive, so I went with stock replacement rotors, and ceramic pads, which should be an "upgrade" to just get the brakes to work as they should. The factory pads were ceramic as well.
Pads
with new wear "abutement" clips
I also found there is a difference between the 2500 Rotors and 3500/4500 rotors. Dimensionally everything is the same, but the 3500 rotors are 5 lbs heavier, and have thicker wear surfaces. Overall width is the same, but the width of vent is wider on the 2500. Decided to go with the 3500 ones.