NGINX - Using variable in proxy_pass breaks routing

I'm trying to get NGINX's resolver to automatically update the DNS resolution cache, so I'm transitioning to using a variable as the proxy_pass value to achieve that. However, when I do use a variable, it makes all requests go to the root endpoint of the request and cuts off any additional paths of the url. Here's my config:

resolver 10.0.0.2 valid=10s;

server {
    listen 80;
    server_name localhost;

    location /api/test-service/ {
        proxy_redirect     off;

        proxy_set_header   X-Real-IP        $remote_addr;
        proxy_set_header   X-Forwarded-For  $proxy_add_x_forwarded_for;

        # If these 2 lines are uncommented, 'http://example.com/api/test-service/test' goes to 'http://example.com/api/test-service/'
        set $pass_url http://test-microservice.example.com:80/;
        proxy_pass  $pass_url;

        # If this line is uncommented, things work as expected. 'http://example.com/api/test-service/test' goes to 'http://example.com/api/test-service/test'
        # proxy_pass  http://test-microservice.example.com:80/;

    }

This doesn't make any sense to me because the hardcoded URL and the value of the variable are identical. Is there something I'm missing?

EDIT: Ah, so I've found the issue. But I'm not entirely sure how to handle it. Since this is a reverse proxy, I need the proxy_pass to REMOVE the /api/test-service/ from the URI before it passes it to the proxy. So..

This:

http://example.com/api/test-service/test

Should proxy to this:

http://test-microservice.example.com:80/test

But instead proxies to this:

http://test-microservice.example.com:80/api/test-service/test

When I'm not using a variable, it drops it no problem. But the variable adds it. Is that just inherently what using the variable will do?