In industrial production, the effective and reliable performance of hydraulic systems is closely associated with product quality, personal safety, economic efficiency, etc. It is of utmost significance to perform the health status evaluation of systems. In this paper, a least-squares recursive parameter identification algorithm is proposed to realize the graded evaluation of the health status of the hydraulic system under variable operating conditions. First, a nonlinear model of the hydraulic system is established based on a mechanism analysis. Based on the system identifiable model obtained by parameter linearization, the least squares recursive algorithm is used to get the system parameters. Second, the system measurable data are graded and labeled under the same operating condition, and the variable parameter ranges under different health states are obtained by the parameter identification algorithm. Finally, under variable operating conditions, the estimates of variable parameters are compared with the range of health state parameters to complete the system health state graded evaluation. The feasibility of the proposed evaluation method is verified by MATLAB simulation software.