Is this used for complimenting based on health or good looks? (like your grandfather vs your girl/boyfriend's fancy outfit)
Probably both, although the good looks option seems more probable. Somehow I imagine that if someone told me that I look healthy, they wouldn't use 'bardzo', but that's just my feel.
I share the intuition about "bardzo dobrze" when complimenting heath in general, however if someone is looking healthier than expected, "bardzo dobrze" would be perfectly reasonable to use (for example, seeing your grandfather recovered from a serious illness, or him looking simply very healthy considering his age).
If it's about looks it would be "good" rather than "well", ("You look good in that dress"), so perhaps "good" should be accepted here as well (if it's not already).
It might be objected that the adverb "dobrze" should be reflected by "well", but in fact "well" is not an adverb here but an adjective, "look" being a linking verb. So gramatically it would make no difference.