A family hears news that it dreads: A loved one needs expensive surgery to survive.

The family debates and decides it cannot afford the surgery. The only option? Put Fluffy to sleep.Michael Dunlap faced a similar situation five years ago when his Persian cat, Monti, needed major surgery. After paying $5,000 to keep his 3-year-old kitty alive, Dunlap started a service rarely offered in this country - pet health insurance.

Dunlap believes Americans are becoming more emotionally tied to their pets, even as the cost of pet health care rises. A study done by Veterinary Economics trade magazine showed health care for a pet costs an average of $173 a year - and is rising an estimated 30 percent annually.

"You have a lot of young professionals whose dog or cat is their only family," Dunlap said. "Families where the dog sits under the table during dinner looking for scraps, empty-nesters whose children are already grown and senior citizens for whom the dog is maybe their only reason for getting out of bed in the morning."

Dunlap, a former business professor at the University of Northern Iowa, founded Pets-health Insurance of Canton with Russell Smith, a former banker whose interest was sparked when his Chihuahua swallowed a rock.

The company, which is licensed in 17 states, has sold about 750 policies since December. Pet owners pay a deductible in the form of either a flat fee or a percentage of the work done.

While pet health insurance is a familiar idea in some parts of Europe - nearly half the pets in Sweden are insured and about 20 percent in Britain - the concept isn't well known in the United States.

Smith says that less than 1 percent of the 55 million dogs and 58 million cats in the United States are insured. As of last fall, there was at least one pet HMO, called Pet Assure.

Experts say the most well-established player in the U.S. pet health insurance market is Veterinary Pet Insurance of Anaheim, Calif., which had the market to itself when it started in 1982.

Veterinary Pet Insurance has about 800,000 policyholders, all in the United States, said company spokesman Bill Skibitzke.

"Pet health insurance is a tough business," Skibitzke said. "You must be licensed and registered in each individual state. There also has not been a lot of promotion about insurance. There are not that many people who know about it."

A study by the veterinary trade journal DMV Magazine found that pet owners start to consider having their animal put to sleep when bills reach an average of $576.

Petshealth offers three levels of coverage, starting at $120 a year for dogs and $83 for cats. The plans range from covering only accidents and emergencies to one with wellness features such as vaccinations. Other procedures included in coverage are spaying and neutering, hospital stays after surgeries, heartworm testing, de-clawing and dental work.

Euthanasia is covered only when it is deemed the only humane thing to do, Dunlap said.

Santo Scala, a Petshealth policy holder from New York, said the insurance has been a boon for him.

"I love my dog and would do anything for him, but I had spent over $1,500 in veterinary bills the year before," Scala said.

Joyce Briggs, a spokeswoman for the American Humane Association, said her organization supports the concept of pet health insurance because it's good for the pet.

"Far too often if a pet is involved in a catastrophic accident the pet owner may have them euthanized when they could be treated," she said, "albeit expensively."