They check for general health, like whether you have terminal illnesses such as cancer, diabetes or AIDS. The exact details.. I am not exactly sure.

Yes, you can fail the health check, I know people who did. PES status is not a deathblow, they might ask for some details, and might request for extra health checks outside or from your specialist. I had to provide extra information when requested to do so (my PES was C when I joined)