I do believe they're supposed to be all healthy horses (ie, not sick) though what actually goes on is a whole other story.
Depending if you are going, while the bidding is going on, or if you see a horse in the KP you like, you'll have to bid.
If you see a horse already in the KP, chances are you won't have to bid, you'll just need to pay the guy his money and the horse is yours. I'm not 100% positive, but I think that's how it works.
I know you're a ways a way from me, but the Camelot auction (in Cranberry, NJ) has some pretty good horses go through there. (that's the one I went to) and also the Lebannon Valley Auction (In PA) is a good (well not good, but they have a lot of horses) to go to. Though most of the horses that go through there wind up in the KP. But there is a rescue organization that goes there and gets horses to rehabilitate them and then adopt them out.
I would suggest that you go a few times before hand just to look and get a feel for the horses there and not be pressured into wanting to bid on a horse. Maybe even talk to the owner and tell him what you're looking for. He might be able to get you a good deal or something.