The maintenance of heterogeneous lipid compositions among cellular membranes is key to biological function. Yet, even the simplest process that could be responsible for maintaining proper lipid distributions, passive lipid exchange of individual molecules between membranes, has eluded a detailed understanding, due in part to inconsistencies between experimental findings and molecular simulations. We resolve these discrepancies by discovering the reaction coordinate for passive lipid exchange, which enables a complete biophysical characterization of the rate-limiting step for lipid exchange. Our approach to identify the reaction coordinate capitalizes on our ability to harvest over 1000 unbiased trajectories of lipid insertion, an elementary step of passive lipid transport, using all-atom and coarse-grained molecular dynamics simulations. We find that the reaction coordinate measures the formation and breakage of hydrophobic contacts between the membrane and exchanging lipid. Consistent with experiments, free energy profiles as a function of our reaction coordinate exhibit a substantial barrier for insertion. In contrast, lipid insertion was predicted to be a barrier-less process by previous computational studies, which incorrectly presumed the reaction coordinate to be the displacement of the exchanging lipid from the membrane. Utilizing our newfound knowledge of the reaction coordinate, we formulate an expression for the lipid exchange rate to enable a quantitative comparison with experiments. Overall, our results indicate that the breakage of hydrophobic contacts is rate limiting for passive lipid exchange and provide a foundation to understand the catalytic function of lipid transfer proteins.