A 32-year-old right-hander, Baez was 4-6 with a 4.02 ERA in 59 games with Baltimore last year, holding batters to a .222 average. He has 114 saves in seven major league seasons.
Lidge led the majors with 11 blown saves last year, but Philadelphia won its second straight NL pennant.
"We're really pleased. In a lot of ways, he's a perfect fit," Phillies general manager Ruben Amaro Jr. said. "His stuff had gotten better and back closer to where he was in the past when he was closing. He's a great competitor."
Baez saved 96 games from 2003-05 with Cleveland and Tampa Bay, then missed the 2008 season following elbow ligament replacement surgery.
Lidge had 31 saves last year but was 0-8 with a 7.21 ERA.
"I saw a lot of them during the playoffs. I knew they needed help in the bullpen," Baez said at a Citizens Bank Park news conference. "My plan isn't to take anybody's job or anything like that, I just want to be in the playoffs."
Lidge's troubles last year followed his stellar 2008 season, when he was perfect in 48 save chances -- including the postseason -- while helping the Phillies win the World Series.
Baez, who defected from Cuba in 1999 and signed with the Indians, has a 35-49 career record with a 4.04 ERA. He gets $2.5 million this year and $2.75 million in 2011.
In addition to the Indians, Rays and Orioles, Baez has also pitched for the Dodgers and Braves.
Left-hander Jamie Moyer is scheduled to undergo a right knee arthroscopy Monday. Amaro does not expect him to be ready by Opening Day. Amaro's next step might be to sign back-of-the-rotation insurance. He has talked to representatives for free-agent right-handers Chien-Ming Wang and Ben Sheets. ... The addition of Baez means there's little chance the Phillies will bring back RHP Chan Ho Park, Amaro said. Park was 3-3 with a 4.43 ERA in 45 games last season.