I don't think it works by reflection. It looks more like transmission, that is, having the IR emitting diode one one side of your finger (or perhaps earlobe) and the phototransistor on the other. Basically, it shines the IR through your finger and based on the amount of IR the detector receives, lights the LED. When your heart beats, the amount of blood in your fingertip increases and the amount of transmitted IR is reduced, thereby lighting the LED. It appears that the variable resistor, R3, could be a sensitivity adjustment. A pulse oximeter probe works the same way, only it determines oxygen saturation of the blood in addition to pulse rate.
JB