Fresenius Medical Care AG & Co KGaA
XETRA:FME
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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 it timely opportunity to guide you through the latest development 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 2. [Operator Instructions] 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. Now 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 the challenging environment, we are continuing to execute on our key strategic initiatives. And as a result, I'm confident that our business model will come through this, both transformed and stronger than before. And of course, none of this would be possible without the incredibly hard work and dedication of our employees, and 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%, and 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 will 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 we're 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 to 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 comes with 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 health care 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.
For 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 Fund. 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 Fund. 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 Fund 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. And 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 be 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 to 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 to 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 to 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 Health Care 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 1/4 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 the home setting in the U.S. remained on the high level of about 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 FME25 transformation program, we have continued to make important progress. Of the EUR 40 million to 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. The Health Care 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.
Revenue for health care products increased by 1% in constant currency. The development was driven by higher sales of in-center disposables in EMEA 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. And during the second quarter, we applied EUR 160 million of the Provider Relief Fund. Savings from FME25 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 to comparisons, it is treated as a special item. Additionally, we incurred EUR 21 million in onetime costs related to FME25. And we have also included the 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 head 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 head 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 reimbursements 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. And 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 costs 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 onetime nature. For the California ballot initiative, Prop 29, our assumption also remains unchanged. And our tailwinds are now projected to bring significantly less support than originally assumed.
Staff shortages are not only resulting in higher labor costs, as I'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 FME25 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 '22 are temporary in nature rather than being structural.
Next, on Slide 8. I've guided you through the head and tailwinds already. And based on our revised assumptions 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 cut in 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 FME25.
However, we still did not imagine in February of last year that we would be seeing continuation of excess mortality into 2022. And it goes without saying that there was no indication that the labor market will develop like it has, staff shortages would reach the unprecedented levels we are seeing today, and there is also no indication that global inflation and supply chain reductions -- disruptions, excuse me, would reach such extraordinary levels or a war would break out in the 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 FME25 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 costs and staffing pressure. As mentioned earlier, our share of home treatments in the U.S. remained at a high level of also -- of over 15% also in the second quarter. And despite the labor shortages also impacting home training, we have enabled a sequential increase in home training 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 USD 6 billion in medical costs under management projected for 2022 as well as the targeted 1% operating income margin on these medical costs under management.
While the three-way InterWell Health merger still expects to close in half 2, we will further expand our value-based care activities in a meaningful way.
Our commitment to sustainability is unwavering. As a health care 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.
And with our FME25 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 2 levels of our organizational structures for nearly old segments and functions. And as we are remapping our operational activities to the future structure, we are bringing our global FME25 vision to life.
With our future operating segments, Care Delivery and Care Enablement, we are finalizing our current -- 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 today 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. And 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 FME25 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 the EUR 40 million to 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 future Care Delivery segment relating to clinical operational efficiencies, 23% has come from the future 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 under 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. FME25 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 FME25 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, thank you for your presentation. And we are now ready to hand over to Timo to open the Q&A line, please.
[Operator Instructions] The first question is from James Vane-Tempest with Jefferies.
I've got 2, please. You mentioned most burdens seem to be temporary so I'm just kind of curious on what you see at the moment. How do you see these easing? Is this more like first half next year as we get into the second half? And what gives you confidence that on the starting side, around 30% of that is permanent, but 70% temporary?
And my second question is you mentioned about delaying some new patients just given the staffing shortages. Just wondering if you can say where the patients are going because, obviously, they need to get treatment. So how is that kind of triaging and working? And how do you see that eventually easing?
Yes. Thanks, James, for your question. Let me unpack those. While we're saying it's temporary, kind of clearly, we are doing all we can on the staffing shortages to really kind of improve the situation. 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 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 have seen in agency. And I think 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 the Q1, where we had critical pay and hot spots and isolation and shift measures as well. So we're clear that this is putting pressure on the overall labor cost, but really being deliberate and putting conservative efforts into trying to manage our way through it and minimizing the impact that goes into the permanent wage rate. So as I said, that 30%, clearly, does have an impact on the wage rates and the headwind into 2023.
The delay -- kind of talking about the delay in patient starts and where the patient is going, as you can appreciate, we're spending a lot of time, and the 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 this constrained capacity in our dialysis clinics.
The other thing that we are kind of trying to get our arms around and get more detail under is we are feeling that physicians and nephrologists who are currently admitting new patients may have become more cautious during this labor challenge in their recommendations to start dialysis given constraints for some clinics. Clearly, that would be kind of a deferral in patient starts because we get this labor piece under control. Clearly, that would catch back up. But I think we obviously are trying to get under this phenomena in much, much more detail with the data that's available. I think we'll have more insights on that as we go through the next quarter, but clearly a significant impact to growth in Q2 that we have not anticipated.
The next question is from the line of Hassan Al-Wakeel with Barclays.
I have a couple, please. So 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? And what is this for labor and nonlabor cost inflation and whether you expect any further government funding?
And then secondly, could you provide an update on the products business, both in terms of machines, when you expect to sell machines, but also on the supply shortages on the remainder of this business around dialysis?
Yes. 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. Clearly, the old assumption of 3% is out of the window. And I think when we were originally looking at this in Q1, we had thought that maybe 5% or 6% overall, that does seem to be trending more like the 9% to 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 PPE 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.
So I think that's the inflation piece. The -- 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 resolves 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 half 1 was around of EUR 15 million on revenue and around EUR 5 million or EUR 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. So clearly, we're trying to do all we can to get that resolved.
On supply chain -- I'm sorry, I'm kind of working through this on my notes here in real time. The -- on supply chain, clearly, we had significant supply chain challenges in Q1 causing some of the shortages on dialysis sites -- hope I'm pronouncing that correctly. But that has mostly resolved, but we still are seeing the kind of the pressures in the supply chain, particularly on the freight and distribution costs. So that maybe just unpacks the other half of our supply chain challenges, both on supply chain challenges and freight costs. So I think that covers everything, Hassan. Thank you.
The next question is from the line of Oliver Metzger with ODDO.
Yes. Oliver from ODDO BHF. First question is a follow-up of a previous question regarding governmental relief funds. So 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.
So history has shown that the payer is basically hold to support the dialysis industry even to a stronger extent, if it is needed. We have seen that through the CARES Act 2 years ago. And from my understanding about the dynamics, it's quite hard to grab. You cut your guide and saying, okay, we have higher costs, but the probability that some relief will come is still high. And if we do the modeling right now and reduce our numbers strongly, we still know, okay, something will come. So can you just give us -- this is part about what would be the typical expectations we should have, which comes additional from the government.
My second question is about the dynamics. So according to your chart, the lower-than-expected business growth seems to be the biggest burden and also the biggest swing factor for your business development, even much more important than inflation itself. So this topic is -- but it's also clearly linked to labor shortage and that basically covers this pretty severe situation. So can you elaborate about the potential solution to solve the labor shortage? What are your options? Also with regards to the time line of hiring, what is possible? For me, it looks like when we go back 2 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 looks like, okay, when does it stop? Nobody knows. So what do you think you can really do to -- also to provide some better visibility about when it turns to better?
Thanks, Oliver, for your questions. Let me work through those in the order that you said them, and I think I caught them all. So yes, 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 prudency's sake, we have not assumed that. Clearly, we will continue to access all challenges for support.
I think what happens with the payer dynamics as we all know, -- and this is 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 -- it would go into the cost bucket for '23 and then not show up until the subsequent years. So 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. But we are looking at every opportunity. And clearly, as new contracts come up for negotiation, this will be an important part of that.
You're absolutely right on your second question that I think inflation, we can all unpack and understand. The business growth deterioration is probably 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. And not seeing this growth come through and actually be negative in the quarter, you can imagine what a surprise and setback that was.
What -- this is labor, not necessarily the cost but truly our ability to staff our clinics and get labor. 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. And really, a targeted program to elevate leadership back on -- focused on these high-performing areas and just kind of improving this timing and personal outreach and recognition programs.
And I think, of course, as I mentioned in my talk outline, really underscores the importance of our home strategy. But obviously, this labor situation is impacting our ability to train. So it's a little bit of a vicious cycle, but I think we're doing all the right measures, we are confident that we will get through this. But I think the perfect storm that hit us in Q2, we have to improve our way out of.
And clearly -- it's not Q2. I think you can all understand this. It's not Q2 in isolation. It's looking at Q2, and that's falling short of expectations and seeing where we are, which really puts the, 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 seems unrealistic.
But 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. 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.
The next question is from the line of Ed Ridley-Day with Redburn.
First question and it's sort of a follow-up on the Provider Relief Fund. Just to clarify, the rural section of that is included in the overall benefit, the 3.2% that you guided to for the quarter. And just to follow up on Oliver's question, is there -- as you said today, there is no further Provider Relief Funding available to you this year or indeed beyond that. And then leading to my second and sort of biggest question is, yes, there are a lot of challenges here. A lot these challenges are outside of your control -- the industry's control.
And obviously, sequestration in fact, 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 Dieter to address those challenges. If you want to speak to that.
Yes. Thanks, Ed. Let me take those questions in order. So yes, the additional rural -- I'm sorry, getting back -- sorry if you're getting echo on the phone. We're hearing it here. So the increase that we got in rural is included in this overall guidance yet. The roughly EUR 46 million that we received, we have invested that back in labor. And as I mentioned, our base for labor was EUR 250 million. We've taken that up to EUR 300 million, funded by this rural. And no further PRF money or funding included.
Clearly, this is a broader issue and a broader issue than even just the dialysis industry, frankly. And all I can say is we have a really, really strong D.C. team who are obviously continuing to lobby and discuss this issue at large. We are working diligently with them on both sides and both parties and flagging the issue. And clearly, we would like -- we'd like a break here. Maybe there will be -- who knows, maybe there will be some relief in the final weeks, but clearly not enough to overcome some of these challenges. So just ongoing dialogue and ongoing discussions, yes, 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. Just -- and it relates to your release as well. The unforeseen reduction in coinsurance payments, is there any more color you can give on that?
Yes. What we're seeing is really just some changing dynamics and benefit coverages, which is kind of accelerating the piece that goes to the patient. We are seeing maybe another new phenomenon with maybe the pressure that everybody is feeling, where higher commercial patients with no secondary insurance is increasing around 3%. And that's driving a higher maximum out-of-pocket liability for those patients. And on average, we're seeing the patient portion of this increase 100 to maybe 300 per patient, and that's impacting both commercial and Medicare Advantage actually.
We are seeing the number of denials increasing and kind of getting harder to collect. The phenomena here is if it's just a payer collectible, that kind of goes through our aged AR and we collect it there. But when it's a patient out of pocket and an increased liability there, it accelerates our need to recognize that bad debt expense. So that's really the phenomenon of what we are seeing here in that part of the press release. We're kind of seeing 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 pharma patients for their increasing out-of-pocket part of these premiums.
The next question is from the line of Graham with UBS.
Great. 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'd 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? And then just a sort of high-level question on debt. Would you be able to give us just a brief run-through of your sort of confidence and flexibility there just so we can get comfort that there's still plenty of flexibility?
Yes. Clearly, we had to put a lot of time and effort into this new guidance and in an accelerated time frame here. I mean we recognize the magnitude of the change, and that is our commitment, this new forecast and this new outlook. What I would say, Graham, on this labor piece, through half 1, the labor and PRF is matched. And we spent, I think I said in the call, EUR 109 million on labor, and that is matched 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. So 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.
Clearly, these -- so if I move to your next question, clearly, these are preliminary numbers, and we did not include cash flow in here. But obviously, we are looking at what that means for kind of a debt position. And there's no doubt, 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 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. So I'm not worried about that. And clearly, we -- on the financing side, we feel well prepared there with the shift of our refinancing and the shift to a bit longer maturity date.
The next question is from the line of Tom Jones with Berenberg.
I just had 2 questions really. One was just to go back to 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 million of that is coming from the product recall side. The other EUR 140 million, is that just coming from the North American products business? Or are there any other sort of 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, just a broad one really on the labor issue again. In the commentary coming out of the sort of hospital sectors, yes, things are bad, but seemingly maybe turning a corner and getting slightly better, whereas the commentary coming out of the dialysis industry is things are bad and getting meaningfully worse. And so I just wondered kind of what you thought the reasons for that might be and whether an improvement in the staffing environment and certainly lower demand for staffing in the hospital sector might ultimately ease the burdens on your side. And if so, when do you think that might happen?
Tom, thanks for your questions. Yes is the answer to your business growth question. But I would just maybe refine it a little to say it is North America Services. And then, yes, I think your comments are well-taken on labor, and that's exactly how we feel and see it as well. And I think some of that is 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, and I think why it's impacting dialysis more in particular, is the renal nurses are kind of a different kind of nurse.
They're pretty special, and the training that they need to go through is higher. So I think the -- I think that's the -- that's perhaps the difference in the phenomena as well. So we've got the technician piece. We all have that. But I think it's particularly for us the challenge on the renal nurses in particular.
And 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. And with 5%, 6% fewer patients around now than where we were a year or 2 ago due to COVID, it seems surprising that so many of them have gone somewhere. But where have they gone? Or where do you feel they might have gone?
Yes. We've had -- as you think about the great resignation, we've had people who are burnt out, they've retired and a number have just exited the workforce. And then I think the hospitals are also pulling on our labor pool as well. So we've seen some of that shift where they're going into this hospital environment, which I would argue is more challenging, any environment than ours. But I think this pull on contract labor and agency labor and the rates that are out there, I mean, we're hearing kind of anecdotal, but like people are being paid $300 an hour just to kind of get into these agencies and contract environment.
So I think we'll see this churn. And as we started to see from Q1 to Q2, that maybe there will be the boomerang effect where we will get people back. But the talent acquisition team is doing a lot on the acquisition and retention of this, but it's clearly a challenge for us.
The next question is from David Adlington with JPMorgan.
Most of mine have been answered, but maybe to just get a bigger picture question. I'm just interested to hear that you're expecting the 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 that the reason for that on some of the headwinds, but for nurse wage inflation given the shortages, that seems a little bit optimistic. So I suppose, given that and also probably an assumption that you're not going to get Provider Relief Funding next year, just wondered if you thought you were actually going to be able to grow earnings at all next year or whether we should be expecting more contraction.
Yes. Clearly, too early to give any insights into 2023, David, with some of the challenges that we're seeing today. I think one thing that we are trying to get under, and maybe it's on this labor piece, and it is temporary, permanent part. What we're trying to forecast, which is increasingly difficult, is this 30-70 split is what we're seeing this year in 2022. And 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 the old phenomenon of everybody being employed or an FMC employee pre-pandemic? Will the new norm be this -- I'm guessing at the percentages. But could it be a 75% FMC employee and 25% contracts, 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 refined to that for 2023. And obviously, we'll give more updates on that as we go through the budget cycle. But I think 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.
So it's -- we're clearly thinking about it. But just for the avoidance of 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.
In the interest of time, we have to stop the Q&A session, and I hand back to Dominik.
So thank you, everyone, for the lively discussion. I apologize that we couldn't take all the questions. I know you have a busy reporting day. Also, this was, of course, the worst call to have to stay have a good summer break. But we hope to see you -- really hope to see you after the summer break again. Thank you.
Thank you, everybody. Appreciate your time today. Take care.