We propose a new approach to simulate the decoherence of a central spin coupled to an interacting dissipative spin bath with cluster-correlation expansion techniques. We benchmark the approach on generic 1D and 2D spin baths and find excellent agreement with numerically exact simulations. Our calculations show a complex interplay between dissipation and coherent spin exchange, leading to increased central spin coherence in the presence of fast dissipation. Finally, we model near-surface nitrogen-vacancy centers in diamond and show that accounting for bath dissipation is crucial to understanding their decoherence. Our method can be applied to a variety of systems and provides a powerful tool to investigate spin dynamics in dissipative environments.