Smoothened (Smo) inhibition by Patched (Ptch) is central to Hedgehog (Hh) signaling. Ptch, a proton driven antiporter, is required for Smo inhibition via an unknown mechanism. Hh ligand binding to Ptch reverses this inhibition and activated Smo initiates the Hh response. To determine whether Ptch inhibits Smo strictly in the same cell or also mediates non-cell-autonomous Smo inhibition, we generated genetically mosaic neuralized embryoid bodies (nEBs) from mouse embryonic stem cells (mESCs). These experiments utilized novel mESC lines in which Ptch1, Ptch2, Smo, Shh and 7dhcr were inactivated via gene editing in multiple combinations, allowing us to measure non-cell autonomous interactions between cells with differing Ptch1/2 status. In several independent assays, the Hh response was repressed by Ptch1/2 in nearby cells. When 7dhcr was targeted, cells displayed elevated non-cell autonomous inhibition. These findings support a model in which Ptch1/2 mediate secretion of a Smo-inhibitory cholesterol precursor.