A long-standing mystery in vertebrate Hedgehog signaling is how Patched 1 (PTCH1), the receptor for Hedgehog ligands, inhibits the activity of Smoothened, the protein that transmits the signal across the membrane. We previously proposed (Kinnebrew et al., 2019) that PTCH1 inhibits Smoothened by depleting accessible cholesterol from the ciliary membrane. Using a new imaging-based assay to directly measure the transport activity of PTCH1, we find that PTCH1 depletes accessible cholesterol from the outer leaflet of the plasma membrane. This transport activity is terminated by binding of Hedgehog ligands to PTCH1 or by dissipation of the transmembrane potassium gradient. These results point to the unexpected model that PTCH1 moves cholesterol from the outer to the inner leaflet of the membrane in exchange for potassium ion export in the opposite direction. Our study provides a plausible solution for how PTCH1 inhibits SMO by changing the organization of cholesterol in membranes and establishes a general framework for studying how proteins change cholesterol accessibility to regulate membrane-dependent processes in cells.