Under the proposed plan, providers would continued to be paid under Medicare's existing payment system.
"However, the hospital where the hip or knee replacement takes place would be held accountable for the quality and costs of care for the entire episode of care—from the time of the surgery through 90 days after discharge," HHS said.
"Depending on the hospital's quality and cost performance during the episode, the hospital may receive an additional payment or be required to repay Medicare for a portion of the episode costs."
Burwell said "This model will incentivize providing patients with the right care the first time and finding better ways to help them recover successfully. It will reward providers and doctors for helping patients get and stay healthy."
During a conference call with reporters, Burwell said the proposal is "what we hear than many doctors and hospitals want."
Read MoreObamacare's big birth control savings
The proposal is subject to a 60-day public comment period.
The American Hospital Association said, "We look forward to working with CMS to ensure the proposed rule meets the needs of our patients and individual communities."
"CMS' proposal raises important questions that require input from hospitals about what the new payment model could mean for how they deliver patient care," said AHA executive vice president Rick Pollack. "We need to fully analyze the impact of the proposed program and will collaborate with hospitals, health systems and CMS to improve upon it.
The president of the American Academy of Orthopaedic Surgeons said "AAOS is closely reviewing the proposed rule and will be submitting comments to CMS,"
"On initial review, we have some concerns about what appears to be the conversion of an evolving demonstration project to a mandatory, hospital-driven payment framework," said the AAOS president Dr. David Teuscher. "Payments that reward higher quality care must be based on appropriately risk-adjusted, patient-centric, transparent measures that empower physicians and surgeons to deliver the best value for the patients they serve."
Premiere Inc., a health-care improvement alliance of about 3,400 hospitals and 110,000 other medical providers, criticized the plan for being compulsory.
"While members of the Premier health-care alliance are strong supporters of bundled payments that include hospitals, we believe CMS's proposed rule requiring hospitals in 75 different regional markets to take the risk associated with a 90-day joint replacement episode is too much, too fast," said company spokesman Blair Childs. "A voluntary, national program would ensure that only providers who are ready to take on this challenge enter the program, avoiding unintended consequences."
"We look forward to commenting on the proposal and working with CMS to create a viable bundled payment program," Childs said.
Dr. Zeke Emmanuel, senior fellow at the Center for American Progress, said, "We vigorously applaud the administration's decision to reform Medicare payments for orthopedic procedures. Importantly, the initiative includes rehabilitation services, patient-reported outcomes, and a 90-day quality guarantee—ensuring high-quality care that is patient-focused."
"Bundled payments are an important tool of the Affordable Care Act, and this is the first time a payment reform has applied to all medical providers in a particular area," Emmanuel said.
"Still, we hope this major reform can quickly be extended to other medical procedures and areas of care such as spine surgery, cardiac procedures, and cancer treatment," he said. "Second, we hope this form of payment for orthopedic procedures becomes the standard method of payment nationwide, not just in selected locations."
Emmanuel also cited a Congressional Budget Office report that found Medicare could save nearly $50 billion over a decade if more procedures were subject to bundled payment models.