Temple University Health System said yesterday that it would cut 500 jobs in a major reorganization attempting to restore financial health to the four-hospital network, which serves as the safety net for some of the city's poorest neighborhoods.

In a city with no public hospital, Temple has, to a degree, been forced into that role, and is now caught between the rising cost of care and the decreasing Medicaid payments to treat those patients that account for nearly half its admissions.

Joseph W. Marshall 3d, Temple's chairman and chief executive officer, said the cuts were necessary to prevent further losses that might damage the system's ability to care for people in the communities it serves, provide high-end care such as heart and lung transplants, and train new doctors.

"A year ago, we got knocked off stride in regards to our financial performance," he said. "As we look at fiscal 2008, we wanted to reduce our expenses to better align them with our revenues."

All told, 6.3 percent of the nonprofit health system's 8,000-person workforce will be eliminated by June 30. That includes 350 employees from across the network who will be laid off, with the remainder coming through attrition and the elimination of now-vacant positions.

In addition, certain "noncore" programs will be scaled back or closed, including the obstetrics program at Jeanes Hospital in Northeast Philadelphia. That would make Jeanes the 11th area hospital to stop delivering babies in the last decade.

The layoffs are expected to occur throughout the organization, from top managers to front-line care-givers and workers in support roles.

Managers who retain their jobs, including Marshall, will face salary reductions and their pay will be frozen, said Rebecca Harmon, spokeswoman for the health system.

Yesterday, many Temple workers waited for word on their fate.

"They laid off someone who had been here 27 years," said Mark Boyd, a cook at Temple University Children's Medical Center since 1998. "I heard they escorted her out of the building crying."

Denise Torres, a surgical resident, said she was concerned and waiting to see "who is going to be laid off."

Then, after a pause, she added: "I'm sure they will come up with a way to make this work so that patient care won't suffer."

In addition to the job cuts, Marshall said, Temple would stop hiring temporary workers, including agency nurses, and would limit overtime.

In fiscal 2006, which ended June 30, the system lost $17 million on about $920 million in operating revenue. In the first half of the current fiscal year, it lost nearly $20 million on $468 million in revenue.

Marshall said he expected the job cuts and other changes to result in net savings of $35 million to $40 million.

Anchored by Temple University Hospital at Broad and Tioga Streets in North Philadelphia, the health system is a key care-provider in the city. In 2006, the four hospitals provided $118 million in care for free or below cost.

Some worry that failing to sufficiently pay hospitals that treat large numbers of poor people could increase disparities in care. "We don't have a system that is taking care of the poor or those that provide their care," said John Dodds, director of the Philadelphia Unemployment Project. "If we don't start making broader changes to our health-care system . . . many poor people will lose access to needed care."

In recent years, as other hospitals in the area closed or were converted to non-acute care, the Temple system's hospitals have been treating more patients covered by the low-paying Medicaid program.

Treating more patients for which Temple is reimbursed at rates below the cost of that care has undermined the health system's fiscal stability.

"Our Medicaid business has grown dramatically," Marshall said. "In 2001, we were 40 percent Medicare and 32 percent Medicaid. Now, we are nearly half Medicaid and 32 percent Medicare."

Some of its woes have been self-inflicted, as Temple closed beds at Neumann Medical Center and Episcopal Hospital, and converted to other specialized uses. But much remained outside the health system's control.

For example, the slow decline of MCP Hospital in East Falls and its 2005 closure increased the pressure.

"Temple has become the de facto safety-net hospital, with the closings and consolidations of other area hospitals," said Michael D. Rosko, a professor of health-care management at Widener University.

"Hospitals in economically depressed areas like North Philadelphia are doomed to hard times unless they can attract well-paying patients from outside their immediate service area," he added.

Marshall said Temple would continue to offer high-end procedures such as transplants, heart care and orthopedic surgery that draw some well-paying patients to the system and help offset free and underreimbursed care.

Nonetheless, Temple's financial woes led Moody's Investors Service to put the system's $340 million in bond debt on a watch list earlier this month for possible downgrade. The New York bond-rating agency cited revenue pressures from Medicaid as a reason for concern.

Moreover, Moody's stated it was concerned that the system's "strategies to reduce losses may potentially have a negative impact on future performance."

Marshall, however, remains upbeat about Temple's long-term prospects. He said the system continued to look for opportunities to grow in certain areas, even as it cut spending.

But major challenges still loom, with proposed federal cuts to Medicare and Medicaid funding in addition to state Medicaid reductions.

In addition to the university hospital and Jeanes, the Temple system includes Northeastern Hospital and Temple Children's Medical Center.

Contact staff writer Josh Goldstein at 215-854-4733 or jgoldstein@phillynews.com.

Inquirer staff writer Henry Holcomb contributed to this article.