Thank you Timo. We do apologize for this call being on short notice and at a time which is from a time zone perspective, not very convenient for everyone. However, we thought a timely opportunity to guide you through the latest developments and the opportunity to ask questions would be more important on, I know, a very busy reporting day. I would like to mention our cautionary language that is in our safe harbor statement as well as in our presentation and in all the materials that we have distributed earlier today. For further details concerning risks and uncertainties, please refer to these documents as well as to our SEC filings. To use the 60 minutes available as efficient as possible for everyone, we have prepared a rather short presentation overnight to leave time for questions. The presentation is available on our website right now.
Please keep in mind that the published documents, the presentation, and our discussion today are all based on preliminary and unaudited numbers. We will publish the final numbers on August second. As always, we would like to limit the number of questions again to two in order to give everyone the chance to ask questions. Should there be further questions and time left, we can go a second round. It would be great if we could make this work again, please. With us today is Helen Giza, our Deputy CEO and CFO, shouldering all of this workload on her own. I will now hand over to Helen. The floor is yours.
Thank you Dominik and welcome everybody and thank you for joining us for today's presentation on such short notice. Before I start my prepared remarks, I want to take a moment to remind everybody that we at Fresenius Medical Care are united by a common purpose, which is creating a future worth living for patients worldwide every day. Our patients continue to be our North Star, and we are doing everything we can during these unprecedented times to ensure our existing patients continue to receive their life-sustaining dialysis treatments without interruption while trying to help as many new patients as possible. Despite this challenging environment, we are continuing to execute on our key strategic initiatives. As a result, I'm confident that our business model will come through this both transformed and stronger than before.
Of course, none of this would be possible without the incredibly hard work and dedication of our employees. I would like to extend my sincere thanks and gratitude to the Fresenius Medical Care team around the world. I'll begin on slide 3. In the second quarter, our business delivered revenue growth of 10% reported and 1% at constant currency. On a constant currency basis and before special items, the operating income declined by 6%. I will guide you through the moving parts later in the presentation. On the same basis, our net income declined by 7%. Worsening macro conditions weighed heavily on the performance in the quarter. In particular, the unprecedented labor market situation resulted not only in higher labor costs, but also in constrained capacities, which is an emerging phenomenon for us that impacts our growth.
Also, the challenging macroeconomic environment further deteriorated, resulting in accelerating inflationary developments and supply chain disruptions. Given the uncertainty of the labor and macroeconomic inflationary environment, we are cutting our financial targets for full year 2022 and are withdrawing our 2025 targets. Moving to slide 4. In February, when we set our outlook for the year, we made specific assumptions based on expectations at the time. However, as just mentioned, we have seen a significant worsening of the macro environment since then and even further meaningful deterioration since Q1. At the end of Q1, which as a reminder, was affected by Omicron, we were still confident, based on thorough and validated analysis, that organic growth would return to normal over the remainder of the year and increased inflation could be offset.
We knew and shared with you that we had a steep curve ahead of us, but were confident we would make that up, even if it meant we would be at the lower end of the guidance range. Starting with the headwinds, I want to walk you through where we stand as of the first half of the year. Of the EUR 270 million-EUR 280 million in headwinds we previously assumed for the full year, we have already realized EUR 175 million in the first half of 2022. The unprecedented labor situation has been the most challenging headwind to date, as many different aspects contribute to the dynamic problem. We continue to experience staff shortages with open positions for our clinic staff, increasing from around 7,000 to over 8,000 at the end of the second quarter.
While we continue to deploy many strategies for recruiting, this compounds our training costs, and we are experiencing a significantly higher than normal staff turnover rate for those new hires, and this is adding to the churn. We are mitigating the resulting shortage wherever possible with either available contract labor which comes at substantially higher rates, or internally by deploying overtime and additional shifts that also come at a premium and adds to the strain on existing employees. Scarcity of available labor and higher wage inflation is adding to our wage compression along with sign-on bonuses. Internally, we are facing equity and retention challenges to counter the lure of higher pay from agencies or other parts of healthcare that are pushing rates up. Our top priority is to maintain patient care and keep our clinics operational and staffed.
However, even with all of these mitigating actions, we are still experiencing staff shortages, which is driving capacity constraints and impacting business growth in Q2, and realistically now also in the second half of the year. The labor costs in the U.S., on top of the typical 3% labor inflation we have historically experienced. We previously assumed a EUR 100 million headwind net of the support received from the U.S. Provider Relief Funds. We said that any additional funds received from the government beyond what we previously assumed would be applied to mitigate these labor pressures. Through the first half of the year, our labor headwind has been fully offset by the receipt of the U.S. Provider Relief Funds. Expenses in excess of the 3% in the first half amounted to EUR 109 million.
During the second quarter and roughly in line with our previous assumptions, we received EUR 163 million in U.S. Provider Relief Funds for our wholly owned clinics to be used throughout the year. On top of that, we received EUR 41 million from the rural section of the Provider Relief Fund that was not included in our original assumptions. As I previously explained, we will use additional funds to mitigate the ongoing labor challenges through the remainder of the year. The challenging macroeconomic inflationary environment deteriorated further in the second quarter, resulting in higher logistics, raw material and energy prices. This has been exacerbated by the global impact from the ongoing war in Ukraine and is expected to persist for the remainder of the year.
As we had flagged during the second quarter, we already anticipated this could exceed our EUR 50 million assumption and easily double, and a concerning development we were watching closely. Year to date, we have already realized EUR 107 million in macroeconomic inflationary headwinds, significantly surpassing that original guidance assumption of EUR 50 million. This also includes the impact from our own supply challenges that we had earlier in Q1, as well as freight costs and material cost increases tied to commodities. In particular, plastics, chemicals and electrical components. The COVID-19 related excess mortality, we assumed a EUR 100 million headwind for the year that reflected the accumulated impact of excess mortality from the prior year, as well as an additional 5,000-6,000 excess deaths.
After higher than anticipated excess mortality in the first quarter due to Omicron, we experienced approximately 300 excess deaths in the second quarter, bringing the total to approximately 2,700 year to date through June. Through the first half, we have experienced an impact of EUR 58 million from excess mortality, and overall, this remains broadly in line with our assumption for the year. For the California ballot initiative, we anticipated EUR 20 million-EUR 30 million in costs to make our case. To date, we have spent approximately EUR 10 million, which is also in line with our expectations. Turning to our tailwind development through the first half of the year, we had previously assumed EUR 340 million-EUR 370 million tailwind in 2022 and have realized only EUR 62 million through the first half.
The business growth, we previously assumed a EUR 250 million tailwind for the year and have realized only EUR 34 million through the first half. While we had assumed the second quarter to be the inflection point of growth in the North American healthcare services segment were around 2%, we have actually experienced a decline of 1.5%. An even stronger growth recovery was assumed and communicated for the second half of the year, which in light of the current environment, no longer seems achievable. There were a couple of developments in particular that adversely affected business growth. First, the increasing labor shortage among our clinic staff has caused capacity constraints and meant that we have had to limit the onboarding of new patients.
We are not training as many new patients for home as we would like, and about one quarter of our transitional care units have had to temporarily pause their trainings due to the staff shortage. However, the share of treatments carried out in a home setting in the U.S. remains on the high level of above 15%. Second, business growth was also negatively impacted by meaningful yet unforeseen bad debt of EUR 37 million due to declines in coinsurance, increases in patient choice of higher deductible plans and lower than expected collections in aged accounts receivable.
The PPE of the anticipated EUR 50 million tailwind, we have only been able to realize EUR 2 million in the first half. While this is an improvement from last year, we have not been able to fully relax our PPE protocols as the pandemic is ongoing and overall infection rates remain high and pricing continues to be elevated. However, given the very high volumes used in the second half of last year, we do expect this to improve over the rest of the year. On our FME 25 transformation program, we have continued to make important progress. Of the EUR 40 million-EUR 70 million in savings we assumed for 2022, we have already realized EUR 26 million through the first half of the year, demonstrating that we are well on track. Moving on to slide 5.
For healthcare services, negative organic growth in North America was offset by positive growth in the international markets. As already discussed, North American services revenue was negatively impacted by severe staffing shortages in the clinics that has impacted our ability to accept new patients in some clinics. While it is hard to tease out its impact in isolation, as just mentioned, it clearly had an impact on organic growth in the second quarter. Revenues for healthcare products increased by 1% in constant currency. The development was driven by higher sales of in-center disposables in EMEIA region. This was partially offset by lower sales of acute cardiopulmonary products and the impact on the voluntary shipment hold of in-center machines in the U.S. following the FDA's recommendation.
We are still in discussion with the FDA, and while we expect this to be resolved and shipments to be resumed by the end of the year, it's unlikely we will be able to install and certify the full backlog of machines before year-end. Turning to slide 6. Here we show the operating income margin development for the second quarter on a reported basis. Business growth, including the adverse effects from capacity constraints in the U.S. and bad debt, together with the COVID-related impacts, had a net neutral impact on margin development. The largest negative impact on margins year-over-year relates to worsening inflation and supply chain disruption, as I previously referenced, followed by labor market challenges. I have guided you already through the different components of the labor cost increase, which were offset by government support.
During the second quarter, we applied EUR 160 million of the Provider Relief Funds. Savings from FME 25 also positively contributed to margin development by EUR 19 million. Turning to special items, the remeasurement effect of our Humacyte investment was a EUR 75 million headwind, and for guidance-relevant comparisons, it is treated as a special item. Additionally, we incurred EUR 21 million in one-time costs related to FME 25. We have also included a special item, the EUR 6 million impact from hyperinflation in Turkey and a EUR 2 million impact from the Ukraine war. Not visualized in this chart, given its relatively small impact in the quarter. Moving on to slide 7.
Based on the headwinds and tailwinds we have seen in the first half of the year, as well as the most current projections that we have, we need to update our expectations for the headwinds and tailwinds for the year. Given our ad hoc release last night, you are already aware of a significant change, but please let me walk you through these changes and assumptions. On the headwinds, the one major change to our previous assumption is the significant further deterioration of the general macroeconomic inflationary environment with elevated supply chain costs and coupled with supply chain disruptions, resulting in a material change for our latest projections.
While we had seen an acceleration of inflation already in the first quarter, we were still in a position to absorb this within our guidance range, along with our previously forecasted organic growth recovery, which clearly would have helped alleviate the higher costs. While we continue to look for opportunities to mitigate these inflationary pressures, sizable portions of our procurement spend are tied to commodity indices with a limited opportunity to negotiate price. Our opportunities to pass on the higher costs through price increases or higher reimbursement are limited in the short term, which results in meaningful added margin pressure to our product business. Therefore, based on our current projections, this headwind has now increased from EUR 50 million to EUR 220 million for the full year. For excess mortality, we saw a somewhat more pronounced impact in the first quarter than assumed due to Omicron.
The current trend, however, confirms our original assumptions of an impact of around EUR 100 million. On labor costs, I have outlined the different drivers that are impacting this development. While overall labor costs have increased beyond our assumptions of EUR 250 million in excess of the standard wage inflation to around EUR 300 million, the additional funds received from the rural section of the U.S. Provider Relief Fund are helping to compensate for this. In line with our original assumptions, we are applying these additional funds to help ease the unprecedented labor market situation. Hence, the expectation for the EUR 100 million headwind net of provider relief funding remains unchanged. We are very conscious of this elevated labor cost and are trying to mitigate the impact of permanent increases compared to temporary increases.
We're currently assuming a split of 30% being permanent and 70% to be of a one-time nature. For the California ballot initiative, Proposition 29, our assumption also remains unchanged. Our tailwinds are now projected to bring significantly less support than originally assumed. Staff shortages are not only resulting in higher labor costs, as we've already explained, but also impact business growth. Based on the trends we have seen throughout the first half, and especially in the second quarter, we are now forecasting flat organic growth in North America services for the second half of the year compared to the previous assumption of accelerated growth recovery, which no longer seems realistic. As a result, we are lowering our expected business growth to EUR 70 million.
For personal protective equipment, we now assume a lower tailwind for the reasons I've already explained, and the FME 25 savings are fully on track as planned, and therefore there is no change to the assumption. Overall, our updated assumptions result in a change of around EUR 380 million compared to our previous expectations. However, we are firmly assuming that most of these effects that impact 2022 are temporary in nature rather than being structural. Next on slide 8. I've guided you through the headwinds and tailwinds already, and based on our revised assumption for 2022, we now expect revenue to be at the low end of the original guidance range and to grow in the low single digits%. For net income, we now have to assume a decline of around a high teens percentage range.
Both targets are, as always, on a constant currency basis and before special items. An additional topic I'd like to mention is the current situation with natural gas supplies from Russia. Although we have not yet been affected by gas shortages, a suspension of gas supply at certain production sites would have a negative impact. This, as of now, is of course hypothetical and hence not included in our new outlook. As you can appreciate, the current outlook for 2022 puts even greater pressure on the back end of our 2025 targets. It is now unrealistic to be able to achieve the meaningfully higher compounded annual average increases that would now be needed to achieve our 2025 targets. When we put out the 2025 targets in the fall of 2020, COVID was forecast to recede.
Patient growth number projections for the following years were only marginally impacted by excess mortality. The moment we saw that the pandemic was far from over and excess mortality continued to accumulate in the thousands, we accelerated and significantly extended our ambitions to invest in ourselves in order to generate future sustainable growth by launching FME 25. However, we still did not imagine in February of last year that we would be seeing continuation of excess mortality into 2022. It goes without saying that there was no indication that the labor market would develop like it has. Staff shortages would reach the unprecedented levels we are seeing today. There was also no indication that global inflation and supply chain disruptions, excuse me, would reach such extraordinary levels or a war would break out in Ukraine.
We hold ourselves to a high standard to deliver on our commitments, and we have done our utmost to forecast accurately and transparently in an ever-changing environment despite the difficulties. The acceleration of all of these factors in the second quarter have truly brought a new set of sizable challenges. While FME 25 is fully on track despite the challenging environment we are in, we will not only continue to assess opportunities to accelerate, but also to broaden the transformation program. This will ultimately support our growth strategy and our margin profile. While our 2025 targets may be withdrawn for truly extraordinary and largely temporary burdens, I want to be very clear that we strongly believe in our business model and remain committed to our strategy and the related initiatives. Moving to slide 9.
Clearly, the headwinds facing our business have intensified, and we continue to make encouraging progress on our strategic priorities. The current labor environment further highlights the importance of expanding home dialysis, which helps reduce the in-center labor cost and staffing pressure. As mentioned earlier, our share of home treatments in the U.S. remained at a high level of over 15% also in the second quarter. Despite the labor shortages also impacting home training, we have enabled a sequential increase in home trainings by 16% during the second quarter.
In value-based care, we are continuing to lead the market in improving clinical outcomes and quality of life for patients in the ESRD and increasingly in the CKD disease stage. We are on track to achieve the $6 billion in medical cost under management projected for 2022, as well as the targeted 1% operating income margin on these medical cost under management. With the three-way InterWell Health merger still expected to close in half two, we will further expand our value-based care activities in a meaningful way. Our commitment to sustainability is unwavering. As a healthcare company, we have set ourselves ambitious targets, and we are continuing to prioritize and progress on our sustainability journey as we are transforming our company. In February, for example, we have set ourselves greenhouse gas emission targets.
With our FME 25 transformation program, we are truly moving forward and are already seeing savings come through as expected. I'm really proud of the progress we are making here, and would like to take the opportunity to share some of our achievements to date in more detail. Moving to slide 10. We are currently in the middle of our transition year towards the future operating model and are making steady progress on the overall implementation and execution of the transformation program. Over the past months, we have reached important milestones, especially in the redesign of the operating model. We have announced the next two levels of our organizational structures for nearly all segments and functions. As we are remapping our operational activities to the future structure, we are bringing our global FME 25 vision to life.
With our future operating segments, Care Delivery and Care Enablement, we are finalizing our country governance, ensuring operational clarity and alignment with the overall group strategy. We anticipate the new country operating model will come into effect together with a new segment reporting structure in 2023. For Care Delivery, our focus is on generating growth in countries with the potential for profitable growth, and thus we will be closely analyzing our country and clinic footprint. Within Care Enablement, our focus to date has been on developing our operating model and capturing productivity improvements in manufacturing and supply chain. Going forward, we are reviewing and streamlining our existing projects and R&D portfolio. Within our G&A functions, the transformation process is progressing well across our global G&A functions.
As an example, in global finance, we are optimizing shared services, leveraging automation and transitioning basic operational activities to lower cost locations like Manila. The investments we have made as part of FME 25 are already starting to pay off. We have delivered EUR 29 million in savings since the start of the program, including EUR 26 million in 2022, and we are well on track to achieve EUR 40 million-EUR 70 million in cost savings this year. To give you a sense of where these savings are coming from, 32% have come from the Care Delivery segment relating to clinical operational efficiencies. 23% have come from the Care Enablement segment with the first savings on productivity efficiencies, and 45% have come from the different G&A initiatives.
In parallel to the plans already identified and with the new structure in mind, we continue to explore new opportunities in both efficiency and future growth to create additional value above and beyond the EUR 500 million we have already identified. FME 25 is a major lever we can pull to drive positive impact against the headwinds facing our business. With greater cost efficiency and a superior ability to capture additional growth opportunities, we strongly believe that FME 25 will enable us to execute on our strategic ambitions and ensure our company's long-term success. That concludes my prepared remarks, and with that, I'll turn back over to Dominik to start the Q&A.
Helen Giza, thank you for your presentation. I think we are now ready to hand over to Timo to open the Q&A line, please.
Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. In the interest of time, please limit yourself to two questions only. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from James Vane-Tempest with Jefferies. Your question please.
Yes good morning. Thanks so much for taking my questions. The two I've got please is, you mentioned most burdens seem to be temporary. I'm just kind of curious from what you see at the moment, how do you see these easing? If it's more like first half next year or as we get into the second half. What gives you confidence that on the staffing side, only around 30% of that is permanent versus 70% temporary? My second question is, you mentioned about, you know, delaying some new patients just given the staffing shortages. Just wonder if you can say where these patients are going because obviously, you know, they need to get treatment. How is that kind of triaging and working and how do you see that eventually easing? Thank you.
Yeah. Thanks James for your question. Let me unpack those. Why we're saying it's temporary is clearly we are doing all we can on these staffing shortages, to really, you know, improve the situation. You know, we know we are investing in the kind of recruiting, the retention, the training, and clearly we are trying to get our arms around the in-house labor versus the temporary labor. And that's why I can kind of speak to maybe the 30-70% split that I outlined. Right now, as I think about the permanent piece, that is really the wage compression that we are seeing, maybe both on existing employees as well as hiring new employees.
We are trying to manage what goes into the permanent wage rate, if you will, and you know, kind of what goes into temporary there would be things like sign-on, for example, that doesn't go into the permanent piece. On temporary, clearly that's impacted significantly by these higher rates that we are seeing in agency. I think, you know, the whole industry is trying to get its arms around that and reduce its reliance on agency staff. Some of the temporary piece of that 70% this year has also gone into Q1, where we had, you know, critical pay and hotspot and isolation shift measures as well.
We're clear that, you know, this is putting pressure on the overall labor cost, but really being deliberate, and putting concerted effort into trying to manage our, you know, our way through it, and minimizing the impact that goes into the permanent wage rate. As I said, that 30%, clearly does have an impact on the wage rate and, you know, headwind into 2023. You know, kind of talking about the delay in patient starts and where the patient's going. As you can appreciate, we're spending a lot of time, and North America team in particular, trying to unpack that against our original assumptions.
We know that the labor capacity is impacting the industry, and we're not alone in having, you know, this constrained capacity in our dialysis clinics. You know, the other thing that we are, you know, kind of trying to get our arms around and get more detail on this is, you know, we are feeling that physicians or nephrologists who are currently admitting new patients may have become more cautious during this labor challenge in their recommendations to start dialysis, given the constraints for some clinics. Clearly that would be a, you know, kind of a deferral in patient starts, but as we get this labor piece under control, clearly that would catch back up.
I think you know, we obviously are trying to get under this phenomenon in much more detail with the data that's available. I think we'll have more insights on that as we, you know, as we go through the next quarter. Clearly, a significant impact to growth in Q2 that we had not anticipated.
Thank you. I'll go back into the queue.
The next question is from the line of Hassan Al-Wakeel with Barclays. Your question please.
Thank you for taking my questions. I have a couple, please. Firstly, can you talk about the overall inflation rate you are seeing in the business today, what your expectation for the second half is, and how this compares to the first? What is this for labor and non-labor cost inflation, and whether you expect any further government funding? Secondly, can you provide an update on the products business, both in terms of machines, when you expect to sell machines, but also on the supply chain shortages on the remainder of this business, around dialyzers. Thank you.
Yeah. Thanks Hassan. I'll unpack the inflation and just to make it very clear for everybody, the labor inflation is included in what we're calling this labor stabilization piece. You know, clearly, you know, the old assumption of 3% is out of the window. I think when we were originally looking at this in Q1, we had thought that may be, you know, 5% or 6%. You know, overall, that does seem to be trending more like the 9%-10%. The inflation measures that we are seeing on the supply chain, obviously, the headwind that we have there is significant.
However, I would say I would split that headwind maybe 50/50, half of it on material costs, inflation and PPV, and then the other half really on freight and supply chain costs. At this point, we are not expecting or anticipating any additional government relief, and that is not included in this outlook. I think that's the inflation piece. You know, pivoting to the products, what are we expecting? As I said in my talk outline, we are now expecting to have the FDA temporary hold resolved by the end of the year. However, that will not mean necessarily that the machines would be installed and commissioned, that we can actually start to recognize revenue.
The impact on that in H1 was around EUR 15 million on revenue and around, you know, 5 or 6 million on EBIT. In the full year, that does ramp up and part of the impact on business growth, it's around EUR 65 million full year and around EUR 30 million EBIT. Clearly we are trying to do all we can to get that resolved. You know, on supply chain. I'm sorry, I'm kind of working through this on my notes here in real time. On supply chain, clearly we had significant supply chain challenges in Q1 causing some of the, you know, the shortages on dialysate. I'm not pronouncing that correctly.
That has mostly resolved, but we still are seeing, you know, the kind of pressures in the supply chain, particularly on the freight and distribution costs. That maybe just unpacks the other half of our supply chain challenges, both on supply chain challenges and freight costs. I think that covered everything, Hassan. Thank you.
Very, very helpful. Thank you Helen. The next question is from the line of Oliver Metzger with Oddo BHF. Your question, please.
Good morning. Oliver from Oddo BHF. First question is a follow-up of a previous question regarding governmental relief funds. Q1 was strongly supported, and you just made the comment that additional relief funds are not part of the guidance. I know it's hard to comment on things which you don't know and which are also out of your control, which in a broader scheme basically affects the whole business. History has shown that the payer is basically willing to support the dialysis industry, even to a stronger extent if it is needed. We have seen that through the CARES Act two years ago. From my understanding about the dynamics, it's quite hard to grasp.
You cut your guidance and saying, "Okay, we have a higher cost," but the probability that some relief will come is still high. If we do the modeling right now and reduce our numbers strongly, we still know, okay, something will come. Can you just give us a little support about what would be the typical expectations we should have, which comes additional from government? My second question is about the dynamics. According to your chart, the lower-than-expected business growth seems to be the biggest burden and also simultaneously the biggest swing factor for your business development, even much more important than inflation itself. This topic is, well, also clearly linked to labor shortage, and that basically converts to this pretty severe situation.
Can you elaborate about the potential solution to solve the labor shortage? What are your options also with regards to the timeline of hiring? What is possible? For me it looks like when we go back two years as we talked about, corona and excess mortality, we talked about vaccination levels, and then it was there was some light at the end of the tunnel. Now it's it looks like, okay, when does it stop? Nobody knows. What do you think you can really do to also provide some better visibility about when it turns to better? Thank you.
Thanks Oliver for your questions. Let me work through those in the order that you said them, and I think I caught them all. Yeah, I mean, you're right. There is payer support, and there has been government support for these unprecedented challenges. Right now, clearly the additional PRF money that we received in 2022, we did have line of sight into that relief and application for those available funds in 2021. It just took a long time to come through. At this stage, we are not aware of any additional funding from the government, so for prudence's sake, we have not assumed it. Clearly, we will continue to assess all challenges for support.
I think you know, what happens with the payer dynamics, as we all know, and this is why kind of somewhat temporary or a lag, the lag in the way the reimbursement process and mechanism and system works is these cost increases that we are seeing in 2022 wouldn't show up in the reimbursement rate for, you know. It would go into the cost bucket for 2023 and then not show up until, you know, the subsequent years. There is a lag on us covering and absorbing these inflationary increases in the short term. As you can appreciate, we are looking at all opportunities to pass this on in price and reimbursement, but I think you're all aware the nature of some of our contracts and so on make that somewhat limited.
We are looking at every opportunity and clearly, as new contracts come up for negotiation, this will be an important part of that. You know, you're absolutely right on your second question that, you know, I think inflation we can all unpack and understand. The business growth deterioration is probably, you know, the biggest surprise for me in the quarter. We had deliberately made that investment in labor so that we could head off this growth, or capture the growth that we had anticipated. You know, not seeing this growth come through and actually be negative in the quarter, you can imagine what a surprise and setback that was. You know, this is labor, not necessarily the cost, but truly our ability to staff our clinics and get labor.
You know what are we really doing about it? A lot. There's a lot of initiatives underway around retention, recruitment, the capacity management in our clinics, plans to reduce the utilization of contract labor when we can get our own labor in, and really try and manage the excessive hourly rates we are seeing. Addressing this higher churn among newer hires is being addressed through an enhanced clinical new hire onboarding program that's already showing a positive impact on retention. You know, really a targeted program to, you know, elevate leadership back on, you know, focused on these high-performing areas and just kind of improving this training and personal outreach and recognition programs. I think, of course, as I mentioned in my talk outline, really underscores the importance of our home strategy.
Obviously this labor situation is impacting our ability to train. So it's a little bit of a vicious cycle, but I think, you know, we're doing all the right measures. We are confident that, you know, we will get through this. I think the, you know, the perfect storm that's hit us in Q2, we have to improve our way out of and clearly, you know, it's not Q2. I think you can all understand this. It's not Q2 in isolation. It's looking at Q2 and that falling short of expectations and seeing where we are, which really puts the, you know, if you want the hockey stick and the growth in the back half really at risk, which is really the reason that I'm calling down guidance because that truly seemed unrealistic.
You know, I think the last part of your question is when do we expect this to improve and is there light at the end of the tunnel? You know, we are truly hopeful that this will return to somewhat normal levels. I don't know what normal is anymore, truthfully, but normal within the first half of 2023.
Okay. Thank you.
The next question is from the line of Ed Ridley-Day with Redburn. Your question please.
Good morning. Thank you and thank you Helen for taking us through this. First question, just to sort of follow up on the Provider Relief Fund. Just to clarify, the rural section of that is included in the overall benefit that the EUR 3.2 that you guided to for the quarter. Just to follow up on Oliver's question, is there, as you sit today, there is no further Provider Relief Fund available to you this year or indeed beyond that? That leads to my second and sort of bigger picture question here is, yes, there are a lot of challenges here, and a lot of these challenges are outside of your control and indeed the industry's control. Obviously sequestration is back.
Is there a dialogue that you are having in Washington which can maybe address this on a bigger picture? Because really there are challenges here that are structural, multiyear, and really it's not really just down to yourselves and DaVita to address those challenges. I don't know if you want to speak to that.
Yes. Thanks Ed. Let me take those questions in order. Yes the additional rural. I'm sorry, getting back. Sorry if you're getting echo on the phone. We're hearing it here. The increase that we got in rural is included in this overall guidance, yes. The roughly EUR 46 that we received, we have invested that back in labor. As I mentioned, our base for labor was EUR 250. We've taken that up to EUR 300 funded by this rural and no further PRF money or funding included. Clearly this is a broader issue than even just dialysis industry, frankly.
You know, all I can say is, you know, we have a really strong D.C. team who are obviously continuing to lobby and discuss this issue at large. We are, you know, working diligently with them on both sides, on both parties and flagging the issue. Clearly, we, you know, we'd like a break here. You know, maybe there will be, who knows, maybe there will be some relief in, you know, the final rate, but clearly not enough to overcome some of these challenges. Just ongoing dialogue and ongoing discussions in D.C. and the D.C. team are incredible and working really hard there to find other alternatives.
Okay. Just a quick follow-up. It relates to your release as well, the unforeseen reduction in coinsurance payments. Is there any more color you can give on that?
Yeah. What we're seeing is really just some changing dynamics in benefit coverages, which is kind of accelerating the piece that goes to, you know, the patient. We are seeing, you know, maybe another new phenomenon with maybe the pressure that everybody is feeling where higher commercial patients with no secondary insurance is increasing around 3%. That's driving a higher maximum out-of-pocket liability for those patients. On average, we're seeing the patient portion of this increase 100 to maybe 300 per patient. That's impacting both commercial and Medicare Advantage, actually. You know, we are seeing the number of denials increasing and kind of getting harder to collect.
The phenomenon here is, you know, if it's just a payer collectible that kind of goes through our, you know, our aged A/R, and we collect it there. When it's a patient out-of-pocket and an increased liability there, it accelerates our need to recognize that bad debt expense. That's really the phenomenon of what we are seeing here, you know, in that part of the press release. We're kind of seeing, you know, kind of quicker claims, quicker adjudication, and we are improving our processes and looking hard at do we need to change the way we collect from our patients for their increasing out-of-pocket part of these premiums.
Thank you very much.
The next question is from the line of Graham with UBS. Your question please.
Great. Thanks for taking my questions. So just for the first one, in terms of the guidance you've given today, how comfortable do you feel that is in terms of conservatism? Because if you look into the second half, as you've mentioned, there's no provider relief as we stand today. So what do you need to do on the labor side to meet that new target? Just a sort of high-level question on debt. Would you be able to give us just a brief run through your sort of covenants of flexibility there just so we can get comfort that there's still plenty of flexibility. Thank you.
Yeah. Clearly we had to put a lot of, you know, time and effort into this new guidance and in an accelerated timeframe here. I mean, we recognize the magnitude of the change, and, you know, that is our commitment, this new forecast, and this new outlook. You know, what I would say, Graham, on this labor piece, through half one, the labor and, you know, PRF is matched. You know, we spent, I think I said in the call, $109 on labor, and that is matched, you know, one for one for the PRF.
If you think about this EUR 300 million of labor, that EUR 200 million is in the back half, and the extra EUR 100 million of PRF that will be applied in the back half will leave us with EUR 100 million of the expense really sitting in Q3 and Q4. We truly are expecting this labor expense to accelerate in Q3 and Q4, but that's really how it's gated and how it offsets with the PRF. If I move to your next question, clearly these are preliminary numbers, and we did not include cash flow in here. You know, obviously we are looking at what that means for you know, kind of a debt position.
There's no doubt, you know, the short-term financial performance is a setback and an impact on our short-term leverage. Nevertheless, we still believe that the growth opportunities will ultimately lead to an improvement in our financial performance, and our leverage ratio, and we remain committed to the leverage ratio. As you can appreciate with this advancement of the Q2 communication, we are working through the balance sheet, but based on, you know, preliminary numbers we've seen today, it's not unreasonable to imagine that we could be around the upper end of that target leverage range, and we'll update more on that next week. On your covenant question specifically, we have only a few financial instruments outstanding with financial covenants, and they're all suspended actually, given our IG status and other hurdles.
I'm not worried about that. You know, clearly, on the financing side, we feel well prepared there, with the shift of our refinancing and a shift to a bit longer maturity dates.
Great. Thank you very much for those answers.
The next question is from the line of Tom Jones with Berenberg. Your question please.
Oh hi. Thanks for squeezing me in at the end. I just had two questions really. One was just to go back to the business growth impacting a bit. I mean, I think the incremental sort of EUR 170 million shortfall that we're looking at is just the biggest surprise. I think you've highlighted EUR 30 of that is coming from the product recall side. The other EUR 140, is that just coming from the North American products business, or are there any other? Sorry, North American clinics business. Or are there any other significant chunks of your business where the business growth is falling well short of expectations? And then the second question was just a broad one really on the labor issue again.
The commentary coming out of the sort of hospital sector is, yes, things are bad, but seemingly may be turning a corner and getting slightly better. Whereas the commentary coming out of the dialysis industry is things are bad and getting meaningfully worse. I just wondered kind of what you thought the reasons for that might be and whether an improvement in the staffing environment, or certainly a lower demand for staffing in the hospital sector, might ultimately, you know, ease the burdens on your side. If so, when do you think that might happen?
Hi Tom. Thanks for your questions. Yes, that is the answer to your business growth question. I would just maybe refine it a little to say it is North America services. Yes, I think, you know, your comments are well taken on labor, and that's exactly how we feel and see it as well. I think some of that is, you know, the hospitals. Maybe the comparison I would make, the hospitals are hiring a whole host of different kinds of staff, in their environment. For us, I think why it's impacting dialysis more in particular is, you know, the renal nurses are, you know, kind of a different kind of nurse.
They're pretty special, and the training that they need to go through is higher. You know, I think that's perhaps the difference in the phenomena as well. You know, we've got the technician piece, we all have that, but I think it's particularly for us, this challenge on the renal nurses in particular.
Where do you think all the renal nurses are going? Because it's quite a specialist sort of part of the nursing world, and most of the demand for renal nurses is within dialysis clinics. You know, with 5%-6% fewer patients around now than where we were a year or two ago due to COVID, it seems surprising that so many of them have gone somewhere. Where have they gone? Or where do you feel they might have gone?
Yeah. We've had, you know, if you think about the great resignation, we've had people who are burned out, they've retired and, you know, a number have just exited the workforce. I think the hospitals are also pulling on our labor pool as well. You know, we've seen some of that shift where, you know, they're going into this hospital environment, which I would argue is more challenging, an environment than ours.
I think these, this pull on contract labor and agency labor and the rates that are out there, I mean, we're hearing, you know, kind of, you know, anecdotal, but like people are being paid $300 an hour, just to kind of get, you know, into these agencies and contract environments. I think we'll see this churn and as we started to see, you know, from Q1 to Q2, that, you know, maybe there will be this boomerang effect where we will get people back. You know, the talent acquisition team is doing a lot on the acquisition and retention of this, but it's clearly a challenge for us. Yeah.
Super. That's very clear. I see we're wrapping up against the hour, so I'll jump back in the queue in case you wanna squeeze one last one in.
The next question is.
Do we have time? Oh, yeah.
Sorry yes. The next question is from David Adlington with JP Morgan. Your question, please.
Morning guys. Thanks for taking the questions. Most of them have been answered, but maybe just, again, a bigger picture question. Just interesting to hear that you're expecting this sort of inflation to moderate in the first half of next year or normalize in the first half of next year. Given those, I can see reasons for that on some of the headwinds, but for nurse wage inflation, given the shortages, that seems a little bit optimistic. I suppose, you know, given that and also probably an assumption that you're not gonna get Provider Relief Fund next year, just wondered if you thought you were actually gonna be able to grow earnings at all next year, or whether we should be expecting more contraction. Thanks.
Yeah, clearly too early to give any insights into 2023, David, with, you know, some of the challenges that we're seeing today. You know, I think one thing that we are trying to get under, and maybe it's on this, you know, this labor piece and, this temporary permanent part, what we're trying to forecast, which is increasingly difficult, is this 30/70 split, which is what we're seeing this year in 2022. I think the discussions I'm having with the U.S. team are, with this dynamic that we've got, will we see a changing shift of the makeup of the workforce in 2023 and beyond? Will it be, you know, the old phenomenon of everybody being employed or an FMC employee pre-pandemic?
Will the new norm be this, and I'm guessing at the percentages, but could it be a 75% FMC employee and a 25% contract temporary labor due to the transient nature of this workforce right now? Obviously, that will change the shift of the cost. But clearly we have a lot of work to do ahead of us on every aspect of this business before we can kind of speak more, you know, more refined to that for 2023. Obviously, we'll give more update on that as we go through the budget cycle. I think though, those are the kind of questions we are already asking ourselves on, does this mix of labor, if you will, shift in the future, and what does stabilize?
You know, we're clearly thinking about it, but just, you know, to avoid any doubt, the 30/70 split is how we're seeing this today. Obviously mindful of the 30 permanent piece, but not sure yet how it will truly play out into 2023 and what implications that will have on the cost base and on growth. Thank you for your question.
Thank you.
In the interest of time, we have to stop the Q&A session. I hand back to Dominik.
Thank you everyone for the lively discussion. I apologize that we couldn't take all the questions. I know you have a terribly busy reporting day. Also, this was of course the worst call to have to say, have a good summer break. We hope to see you. We really hope to see you after the summer break again.
Yeah.
Thank you.
Thank you everybody. Appreciate your time today. Take care.