SPRINGFIELD - Baystate Health announced Wednesday that it is eliminating 354 jobs at three western Massachusetts hospitals, in a move administrators said was needed to preserve the financial health of the region's largest private employer.

The layoffs, which will be spread across Baystate Medical Center in Springfield, Baystate Franklin Medical Center in Greenfield and Baystate Mary Lane Hospital in Ware, will see 169 managers and staff lose their positions. Another 189 currently unfilled positions will also be eliminated. The cuts are effective Aug. 19.

"This day is a somber one for all of us because it affects the lives of our Baystate family," said Mark Tolosky, president and CEO of Baystate Health, in a statement. "Working in health care, where we link our work to our charitable mission 'to improve and save lives every day with quality and compassion,' our work fulfills a passion for so many of us along with a career. Today, that road takes a different turn for 169 members of the Baystate family."

Baystate Health employs approximately 10,000 people, the Associated Press reported.

In 2010, Baystate Medical Center had an operating profit margin of 6.3 percent and a total surplus of $73.8 million, according to documents filed with the state.

Yet the story was different in Greenfield and Ware. Franklin Medical Center reported a 6 percent operating loss while Mary Lane Hospital posted an 11.5 percent loss, the total amounting to nearly $7 million.

At the same time, a $296 million effort to revamp the hospital system's facilities in Springfield remains on track. The planned Davis Family Heart and Vascular Center is on budget and on schedule to be completed by its March 2012 target date, they said.

Hospital administrators said rising costs and falling reimbursement from the state were behind the layoffs. They criticized the state's health care cost-containment efforts, saying they had placed increased pressure on hospitals at a time when Medicaid reimbursements are being cut.

"At Baystate Health, we embrace changing models of patient care and health care coverage expansion - however, these changes are not based on a properly funded plan," Tolosky stated. "Massachusetts has expanded and enhanced health care for our residents, which we applaud - but the commonwealth is not paying for these commitments."

Medicaid reimbursement rates have failed to keep pace with the rate of medical inflation, estimated at 3 to 4 percent annually, hospital officials said. They said the state failed to pay $26.5 million to help cover the cost of Medicaid patients in 2010. Such patients represent 26 percent of Baystate's total patient population.

In response to such cuts, hospital officials said they had employed a series of cost-cutting measures, including the consolidation of non-clinical service, initiatives aimed at reducing the cost of materials and supplies and a program aimed at reducing waste and increasing efficiencies.

But in the end, those measures were not enough to cover a projected $25 million budget shortfall in 2011 and $54 million deficit in 2012, administrators said.

"The realities of the health care cost-containment environment caused us to take additional steps, which include reducing the size of our work force," Tolosky said.

The recently enacted state budget for fiscal 2012 calls for $770 million in cuts to keep up with the expected growth in MassHealth, the state's Medicaid program, according to the Massachusetts Budget and Policy Center, a think tank.

State officials said the poor economic climate necessitated the cuts. And they noted that Baystate Health was recently issued $2.2 million through a Medicaid waiver agreement.

"In the face of shrinking state revenues due to the national economic collapse, state agencies have had to make some very difficult budget decisions," Jennifer Kritz, communications director for the Executive Office of Health and Human Services, said in a statement. "Hospital rate increases have been funded at the experienced rate of overall health care inflation."

Wednesday's layoffs were the latest in a string of cutbacks at area hospitals. Baystate Health eliminated 120 vacant positions in 2008 along with 55 managers and staff.

Cooley Dickinson Hospital in Northampton, the city's largest employer, laid off 81 employees in 2008, about 20 in 2009 and approximately 100 in 2010. In February, Cooley Dickinson officials announced that Baystate Health was one of four hospital systems interested in "partnering" with the Northampton hospital.

Robert Pollin, professor of economics and co-director of the Political Economy Research Institute at the University of Massachusetts, noted the industry's importance to the area economy. He said the layoffs could endanger the region's tenuous recovery from the recession.

He pointed to figures from the Bureau of Labor and Statistics, which reported that 60,900 workers, approximately 17 percent of the region's work force of 351,200, were employed in education and health care as of May 2011.

"Health care is a major engine of the economy. When we start to see cutbacks of that magnitude in western Massachusetts, they are going to spill over into the whole region," Pollin said.