This paper analyzes the system-level state of health (SOH) and its dependence on the SOHs of the battery modules within the battery system. Due to the stochastic nature of battery aging processes and their dependance on charge/discharge, depth, temperature, and environment conditions, prior or long-term prediction of each module’s SOH is difficult. Based on estimated SOHs of battery modules during battery operation, we demonstrate how the SOH of the entire system decays when battery modules age and become increasingly diversified in their maximum ampere-hour capacities. System-level energy efficiency is analyzed. It is shown that by using battery reconfiguration after a length of service, the overall battery usable capacities can be utilized more efficiently, leading to extended operational ranges of the battery system. Analysis methods and simulation studies are presented.