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Lord Shiva has been worshipped in Linga form from time beginning as described in answer here. Among the Lingas there are 12 Jyotirlingas which are of special importance.

Mahatmya of 12 Jyotirlingas is described in Koti Rudra Samhita of Shiva Purana in the chapter "Dwadash Jyotirlinga Mahatmya". It states:

सौराष्ट्रे सोमनाथं च श्री शैले मल्लिकार्जुनम् ।
उज्जयिन्यां महाकालमोंकारे परमेश्वरम् ।।
केदारं हिमवत्पृष्ठे डाकिन्यां भीमशङ्करम् ।
वाराणास्यां च विश्वेशं त्रयम्बकं गौतमीतटे ।।
वैद्यनाथं चिताभूमौ नागेशं दारुकावने ।
सेतुबन्धे तु रामेशं घुश्मेशं च शिवालये ।।
द्वादशैतानि नामानि प्रात्यस्त्थाय यः पठेत् ।
सर्वपापविनिर्मुक्तं सर्वसिद्धिफलं लभेत्
।।

Somanath in Saurashtra, Mallikarjuna in Shri Saile, Mahakala in Ujjaiyana and Parameshawara also manifested as Omkara. Kedara in Himavat and Bhima Shankara in Dakinya. Vishewaswara in Varanasi and Trayambaka in side of Gautami. Vaidyanath in ChitaBhumi and  Nageshwara in forest of Daruka. Rameshwara in Setubandha and Ghusmeshwara in Shivalaya. These name of 12 Jyotirlingas who recites in morning, he gets freed from all sins and is eligible to get all Siddhis.

There are twelve Jyotirlingas mentioned in the similar popular verse.

Saurāṣṭre Somanāthaṃ ca Śrīśaile Mallikārjunam

Ujjayinyāṃ Mahākālam Omkāram Mamleśhwaram

Paraly Vaidyanāthaṃ cha Ḍākinyāṃ Bhīmaśhaṅkaram

Setubandhe tu Rāmeśaṃ Nāgeśhaṃ Dārukāvane

Vārāṇasyāṃ tu Viśveśaṃ Tryambakaṃ Gautamītaṭe

Himālaye tu Kedāraṃ Ghuśmeśaṃ ca Śivālaye

etāni jyotirliṅgāni sāyaṃ prātaḥ paṭhennaraḥ

saptajanmakṛtaṃ pāpaṃ smaraṇena vinaśyati

I have already asked a question about Somanath What is the story of Somanath Jyotirlinga? and Mallikarjun What is the story of Mallikarjuna Jyotirlinga? and Mahakaleshwar What is the story of Mahakaleshwar Jyotirlinga? and Omkareshwar What is the story of Omkareshwar Jyotirlinga?. Now I want to know the story of Vaidyanath Jyotirling.

Please mention the scriptural reference.

Vaidyanath temple is situated in Deoghar, Jharkhand.

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By William Hodges - https://commons.wikimedia.org/w/index.php?curid=31452951

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There are three Shree Shiv Jyotirlinga's with name Vaidyanath in India as -

1) Vaidyanath Jyotirlinga - Deogarh: -Baidyanath Dham  , Deogarh district of Jharkhand.

2) Vaidyanath Jyotirlinga - Parli Village ,  Parli Vaidyanath temple  , Beed District , Maharastra State

3) Vaidyanath Jyotirlinga - Kangra:- Baijnath , Himachal Pradesh State.

More here

In this answer I am giving information about Parali-Vaidyanath Jyotirlinga in Maharastra State.

Parali village is located on the slopes of Meru or Naganarayana Mountain. Parali is an ancient village located near three rivers, Brahma, Venu and Saraswati, because of the presence of one of the twelve JyotirLingas of Shankara, it has become famous. This village is also known as Kantipur, Madhyarekha Vaijayanti or Jayanti. It is 26 kilometers from Ambejogai in the Beed district. (Maharastra , India).More here

According to Shiva MahaPuran KotiRudra Samhita 1:21:24 (शिव महापुराण कोटि रूद्र संहिता) the location of Baidyanath (वैद्यनाथ) is identified as"chidabhoomi" (चिदा भूमि) - which is possibly the ancient name of Deoghar (देव घर).

पूर्वोत्तरे प्रज्वलिक निधाने । सदा वसंतम गिरीजा संमेतं ।।

सुराससुरधित पादपद्मम । श्री वैद्यनाथ ताममहं नमामि ।।

Poorvothare prajwalika nidhane sada vasantham girija sametham surasuraradhitha padapadmam srivaidyanatham thamaham namami

वैद्याभ्यं पूजितं सत्यं , लिंगमेतत्त पुरातनं ।

वैद्यनाथमिति प्रख्यातं सर्वकाम:प्रदायकं।।

Vaidyabhyam Poojitam Satyam, Lingametat puratamam Vaidyanathamiti prakhyatam Sarvakamapradayakam”. Here Lord Vishnu helped the Devas to obtain Amrit. Therefore, this place is also known as ‘Vaidyanath"

In material sence -:

There are lot's of useful medicinal plants and herbs , in the nearby jungle , and mountain range , that's why Parali Jyotirling is also known as "Baidyanath" meaning Lord of vaidyanath( वैद्य)

The story According to Shree Shiva Maha Puran-:

Shiva Purana (Kotirudra Samhita 28): Ravana worships Shiva in Kailasha: Once Ravana, who was full of pride worshipped Lord Shiva in the Kailasha mountain. When he could not please Shiva, he performed more severe tapas. Thereafter he performed tapas at Siddhisthana on the southern side of the mountains within a cluster of trees. He dug up a pit, lighted fire in it, and placing the Shiva Linga nearby, performed homas. In summer he performed tapas in panchagni (five fires), during rainy season he sat on the bare earth, and during winter he performed tapas in water. But even then Shiva was not pleased, because Shiva is not pleased with evil-minded persons. Thereafter Ravana became noble and started offering his heads to Shiva, one by one daily.

Shiva gives boon to Ravana: After offering nine heads, when he was about to offer his tenth head, Shiva appeared and prevented him. Shiva also restored all his other heads and bestowed on him immense prowess. Also, as a boon Ravana wanted to take Lord Shiva himself to Lanka. Shiva instead gave him a Shiva Linga and told him that wherever he kept it on the ground, it will get fixed there.

While carrying the Shiva Linga, Ravana felt a great urge to ease himself due to Shiva Maya. Seeing a cowherd boy, he gave him the Linga to hold for sometime. But the cowherd boy was unable to bear the weight of the Linga for long, and placed it on the ground. The Linga got fixed there and came to be known as Vaidyanatheshwara. It bestows both worldly prosperity and salvation, and removes sins by a mere look. After Ravana left, the gods came there, worshipped that Shiva Linga and returned to their respective abodes.

ॐ नमः शिवाय

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    Location is moot topic. Both sentences वैद्यनाथं चिताभूमौ and परल्या वैजनाथं च are there in Shiva Purana and that's the reason for confusion. Anyways. story will not change. – The Destroyer Jul 30 '16 at 4:35
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    @TheDestroyer Thanks for clarification. Yes I do agree the story is same in both cases. – Triyugi Narayan Mani Jul 30 '16 at 4:41

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