Will Smith definitely had an entertained look on his face at first and then Chris Rock continued. He then had a WTF face when Will Smith walked up on the stage.
I don't think it was publicized that Jada Smith had a medical condition. She decided not to conceal it with a head covering or perhaps one of those high end hair pieces. As I linked earlier, there are women of color who sometimes have very close cropped hair as a style choice. I linked earlier to the profile page of a host Jacqueline Stewart on TCM who does but it is not as bare as Jada Pinkett's. I can't recall their names but there have been models with close cropped or shaved hair.
I guess no one remembers Don Rickles, who's schtick was being an insult comic. I think what Chris Rock said was pretty mild compared to what he would get away with and the celebrities loved it. I'm not sure the audience even got the joke, referring to an old Demi Moore movie where she shaved her head for the part.