The law says "any individual" insured through Medicaid "may obtain" care from any qualified and willing provider.
Justice Neil Gorsuch wrote for the majority that Medicaid recipients do not have the right to sue to enforce that provision.
Medicaid is prohibited from paying for almost all abortions, but states want to cut government funding for other services Planned Parenthood provides.
The suit, supported by the Trump administration, was brought by South Carolina.
South Carolina Gov. Henry McMaster (R) praised the ruling Thursday, saying, "Seven years ago, we took a stand to protect the sanctity of life and defend South Carolina's authority and values — and today, we are finally victorious."
The ruling has implications for other states, at a time when red states across the country are looking for ways to deprive Planned Parenthood of funding. Nationally, the Trump administration is withholding federal family planning grants from nine Planned Parenthood affiliates.
Texas, Arkansas and Missouri already block Planned Parenthood from seeing Medicaid patients, and the organization has said it expected many other Republican-led states to do the same if the Supreme Court sided with South Carolina.
"Today, the Supreme Court once again sided with politicians who believe they know better than you, who want to block you from seeing your trusted health care provider and making your own health care decisions," Alexis McGill Johnson, president and CEO of Planned Parenthood Federation of America, said in a statement.
"And the consequences are not theoretical in South Carolina or other states with hostile legislatures. Patients need access to birth control, cancer screenings, STI testing and treatment, and more."
Roughly 72 million low-income Americans receive health insurance through Medicaid, according to the most recent enrollment numbers.
And more than 1.3 million South Carolinians — or 20 percent of the state — are enrolled in the program, according to the health policy nonprofit KFF.
"As extremists in every branch of our government are targeting Planned Parenthood and attempting to strip millions of Americans of the care their health centers provide, this is nothing more than a politically-motivated green light to anti-abortion politicians," Reproductive Freedom Caucus co-chairs Reps. Diana DeGette (D-Colo.) and Ayanna Pressley (D-Mass.) said in a statement.
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