This paper investigates regional hospital efficiency in China. As hospital operations naturally increase along with an undesirable output of patient mortality, which may induce medical disputes and ligations, this study adopts data envelopment analysis to evaluate and compare the efficiency scores obtained with and without considering the undesirable output. On the basis of province-level panel data over 2002-2008 and considering the risk-adjusted undesirable output, empirical estimates indicate that hospital efficiency is moderate, but increases gradually from 0.6881 to 0.8159. Importantly, without considering the undesirable output, the average efficiency score is overestimated and the efficiency ranking across provinces changes considerably. An efficiency gap is found between coastal and non-coastal regions, but this gaps drop is mainly contributed by the fast efficiency improvement of the western regions. However, the central regions continue to achieve a significantly lower efficiency score than the eastern and western regions. Moreover, the initiation of the New Rural Cooperative Medical System has overall enhanced hospital efficiency in China, especially for the non-coastal regions.