That's exactly what that option is supposed to do...
From
the post describing that feature: This feature in the software will slice the model taking all of the outer most perimeter outlines and slice with those assuming a solid model as the interior. For instance, if you had a model that was a block with screw-holes in it, but had "Merge all outlines into a single solid model" on, the holes would not show up. Using Merge all outlines is generally really useful for models that have errors in the mesh or if using Vase Mode.