Is it possible to set up Service Entries pointing to 2 fqdn or ip address and have istio load balance it while checking active health of individual ip/fqdn external services?
There is outlier detection but that can lead to some negative if we can't control some endpoint /my/custom/health.
Unfortunately this idea of having service entries (accompanied with WorkloadEntry) equipped with HealthCheck probe was abandoned some time ago. Check this closed PR on github.
As a alternative, if you have direct control of hosts/servers, where externally to your service mesh workloads are running, you may try to use Auto-Registered WorkloadEntries (these support ReadinessProbes). Check this guide how to accomplish it.