Morphogens are ‘form-generating’ substances that spread from localized sites of production and specify distinct cellular outcomes at different concentrations. A cell's perception of morphogen concentration is thought to be determined by the number of active receptors, with inactive receptors making little if any contribution. Patched (Ptc)^,,,, the receptor for the morphogen Hedgehog (Hh)^,,,,,,, is active in the absence of ligand and blocks the expression of target genes by inhibiting Smoothened (Smo), an essential transducer of the Hh signal^,,,,. Hh binding to Ptc abrogates the ability of Ptc to inhibit Smo, thereby unleashing Smo activity and inducing target gene expression^,,,,,,. Here, we show that a cell's measure of ambient Hh concentration is not determined solely by the number of active (unliganded) Ptc molecules. Instead, we find that Hh-bound Ptc can titrate the inhibitory action of unbound Ptc. Furthermore, we demonstrate that this effect is sufficient to allow normal reading of the Hh gradient in the presence of a form of Ptc that cannot bind the ligand but retains its ability to inhibit Smo. These results support a model in which the ratio of bound to unbound Ptc molecules determines the cellular response to Hh.