To modify the structure of thermal barrier coatings and improve their high-temperature resistance, induction plasma spheroidization (IPS) technology was applied to regulate the structure of YSZ powders in this study. The surface morphology, particle size distribution, phase composition, and internal microstructure of the conventional agglomerated and spheroidized powders were characterized using scanning electron microscopy and focused ion beam analysis methods. The results showed that the microstructure of the powders presented uneven evolution in the induction plasma stream. Due to the existence of the temperature gradient along the radial direction of the powders, the IPS powders consisted of outer dense shells and internal porous cores. The mechanical property of such shell–core structure was analyzed by using the finite elemental simulation method. In addition, coatings were prepared using the IPS powders and the agglomerated powders. The IPS coating showed improved water-cooling thermal cycling resistance compared to the conventional coating.