The court's 6-3 decision would let a novel program take effect in Maine, where supporters say it would cut prices by 25 percent and help more than 300,000 residents.
Nationwide, drug prices have been rising by double-digit percentages every year. A dozen or more states have been poised to follow Maine's lead with similar programs, and more than two dozen backed Maine on the Supreme Court case.
Justices stopped short of any broad endorsement of the merits of Maine's plan. The ruling said only that drug makers did not adequately show why the plan should be blocked.
"By no means will our answer to that question finally determine the validity of Maine's Rx program," Justice John Paul Stevens wrote for the court.
CBS News Correspondent Cynthia Bowers reports Monday's Supreme Court decision could be a huge financial relief to Viola Quiron and a lot of senior citizens in Maine like her who have no prescription drug coverage .
"It was bad for us, very bad. Today's a great, great day," says Quiron. "I haven't felt this good in four years."
Maine Rx, as the program is known, was approved by the Legislature in 2000. It would use the state's buying power under the federal Medicaid program to negotiate bulk discounts from drug companies.
The state says the program is intended to help the working poor, retirees and others who do not receive health coverage or drug benefits through their jobs. If prices didn't drop in three years, the state could impose price controls.
"I think it sends a huge signal to these big pharmaceutical manufacturers, 'Look, you have to look at your prices and you have to look at making sure this is fair to all American citizens,'" says Chellie Pingrie, former president of the Maine state Senate.
The drug industry points out the ruling is by no means the final word and key issues surrounding the case have yet to be decided, but for now this decision comes as a victory for the uninsured Americans who have been forced to make tough choices as the cost of prescription drugs have shot up an average of 15 percent a year.
The increase has been driven by popular drugs like the acid-reflux medication Prilosec, which has jumped 27 percent over the last five years to $1,600 a year. Cholesterol-lowering Pravachol has jumped 41 percent to more than $1,000.
In all, 29 states and Puerto Rico expressed support for the Maine initiative, which is a clear indicator of the impatience being felt in statehouses over the lack of prescription drug reform at the federal level. Illinois is one of the state's forging its own plan, which would form a buying pool in order to buy at bulk discounts.
Gov. Rod Blajogevich, D-Ill., says, "If we wait for Washington to act, some things never get done. So we're going to seize the opportunity that we have here. I think that the genie is out of the bottle."
Marjorie Powell, spokeswoman for the drug industry group that sued over the Maine program, said it is too soon to tell what effect the court ruling will have.
"There are better answers than the one Maine offers," Powell said. The Pharmaceutical Research and Manufacturers of America claims Maine's approach would prevent some patients from getting the specific drugs they want if the state determined those drugs cost too much.
Only Justices David Souter and Ruth Bader Ginsburg fully agreed with Stevens' analysis of the potential benefits of the Maine program, but Justices Antonin Scalia, Clarence Thomas and Stephen Breyer agreed that the program should have a chance to take effect.
Chief Justice William H. Rehnquist and Justices Sandra Day O'Connor and Anthony Kennedy dissented on that point. They would have left in place a lower court order blocking the program.
The Bush administration had urged the court to block the law. Business groups and conservative legal organizations sided with the drug industry.