(FORTUNE Magazine) – "Jack, I need your help." It was late one night in August 1997, and Thomas Frist Jr. was desperate. The vice chairman and largest individual shareholder of Columbia/HCA, the nation's biggest for-profit hospital chain, knew his company was in deep trouble. Federal agents had raided its facilities in El Paso a few months before, and now the government was conducting a full-blown investigation into massive Medicare fraud at the company. The once-highflying stock had dropped like a stone, and CEO Richard Scott, the man to whom Frist had entrusted the company he and his father had founded years before (brother Bill is now the Senate majority leader), had just resigned under pressure. After Scott's Columbia Healthcare merged with Frist's HCA in 1994, Frist had stepped down as CEO. Now he was coming back to save the company, if he could. And he wanted his old COO, a former Navy lieutenant named Jack Bovender, to help him.

Few observers thought Frist, currently 65, and Bovender, 58, stood much of a chance. But the company, now called HCA, didn't die. Far from it. Frist and Bovender, who became CEO in 2001 (Frist is still on the board), pulled off one of the most remarkable corporate rescues in memory. They recently settled the fraud investigation and have put HCA back on solid financial footing. Thanks to a major restructuring--in which they sold off half the company's hospitals--they have focused their business on the nation's biggest and fastest-growing markets. In major metropolitan areas from Denver to Las Vegas to Kansas City, HCA has oligopoly-like status, controlling 25% to 40% of the market for hospital services. In February the company is expected to report that it earned a near-record $1.4 billion on $21.8 billion in sales in 2003. Even Warren Buffett is impressed: Berkshire Hathaway has disclosed that it holds about 18 million shares of HCA, which now sells for $45, the price at which it traded before the Medicare scandal.

Should you follow Buffett's lead and buy HCA stock? The answer depends partly on whether the company has solved its governance problems--and appears to be yes. Even former Columbia/HCA bashers say it is behaving better. And for good reason. As a condition of its settlement with the feds, the company has to adhere to a strict set of guidelines that the inspector general of the Health and Human Services Department described as "unprecedented in scope and level of detail." Among other things HCA has to hire outside firms to conduct regular companywide audits that cover everything from lab billing to financial relationships with physicians. The agreement runs through 2008.

The company might need all that time to fully repair its reputation. The federal probe into Columbia/HCA was the longest and costliest investigation for health-care fraud in U.S. history. Among the crimes uncovered: offering doctors financial incentives to bring in patients, falsifying diagnostic codes to increase reimbursements from Medicare and other government programs, and billing the government for unnecessary lab tests. HCA wound up pleading guilty to more than a dozen criminal and civil charges and paying fines totaling $1.7 billion.

Now, however, Bovender is promoting a patients-first philosophy. The hospital giant is spending billions over the next several years on emergency rooms and other high-end services aimed at attracting aging baby-boomers. Among other advances, HCA is introducing bar-coded wristbands for patients that allow nurses to scan them for treatment information, reducing medication errors.

As we pointed out last month (see "Reality Checkup" on fortune.com), some investors worry that a continued rise in bad debt from patients unable to pay their bills will hurt earnings at HCA and other hospital companies this year. In the third quarter HCA's bad debt, or accounts considered uncollectible, accounted for 10.3% of revenues, compared with 8.3% last year. But Bovender says that that is largely a temporary problem, and that debt levels will moderate as the economy and employment levels recover. Indeed, he expects to reduce the company's debt-to-capital ratio, now 55%, to as low as the mid-40% range by the end of next year.

Most Wall Street analysts like what they see. Selling for 16 times trailing earnings, HCA shares look cheap compared with the broader market, which carries a P/E of 24. They expect a steady rise in admissions to boost earnings 13% a year for the next several years. "HCA has a great asset base," says Ellen Wilson, an analyst at Sanford C. Bernstein. "They also have one of the best management teams--if not the best one--in the industry." By bringing in Jack Bovender, it seems Frist applied the right medicine.