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Is it legal for a doctor to charge one price if a patient pre-pays and another price if insurance is billed?

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Yes of course, it is completely legal and it is ethical and is a common sense practice in every doctor or dentists office i've ever been in. The reason your doctor can offer the service for less is that when we self pay, the doctor does not have to deal with mountains of paper work required by the insurer and then wait months upon months to get paid.

All the extra paperwork, the staff needed to complete the insurance forms, make follow up calls and get pre-authorizations, in network out of network and other compliance issues can easily add anywhere from 30 to 100 percent and more to the cost of our care.

It's a matter of overhead and fair value. Less overhead translates to lower cost to the consumer for those services. If the patient is self pay, they likely do not have insurance to cover the vsit anyway so this is a win for both the patient and the doctor. The doctors office is spared the many hours of paperwork and phone calls for your 15 minute visit giving them more time to see other patients and the savings is passed along to this patient.
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I would seek legal counsel on this from someone who is familar with medical claims. In the meantime, do you have anything in writing from the hospital showing the agreed upon amounts? It is legal for a hosptial to charge different amounts because doctors and hospitals that are treating pre-authorized insurance patients have entered into an agreement with the insurance company to accept its "fee schedule," which is the preset prices for specific procedures and supplies whereas pre-paid patients have non-covered procedures with no preset fee schedules and agreements with hospitals except on a case-by-case basis. But if you have something in writing proving your agreement with the hospital and its staff for this procedure, they cannot charge you the difference. In fact in the state of Tennessee, medical bills cannot be turned over to collections and cannot "hit" your credit report at all whether good or bad. It is considered a privacy violation to place medical billing information on a credit report. So, in Tennessee, we are protected from vicious billing offices and mob-like collections agencies. We cannot be forced into borrowing money to pay a medical debt either. With this knowledge, it's easier to stand up to harassing collectors. I've actually begged them to take me to court so that I could get the judge to determine that I had suffered enough and have the debt cleared altogether. When they know that I'm not afraid of them, they become much nicer in a hurry.
Also, did you try to pre-authorize this procedure with your insurance? Did they know anything about it and notify you of its policies based on the information provided to them? If they knew of your procedure, but didn't bother to tell you their policies, I would take that to legal counsel. Secondly, was there any information given to them that you had pre-paid? They may be denying because you've pre-paid not because the procedure is non-covered. When I worked for Medicare, a doctor could not bill the patient and then bill Medicare if the patient had pre-paid any amounts above his co-pays. The patient was expected to file a short claim with receipts showing payment because then we could pay the patient directly instead of trusting the doctor to reimburse him.
FILE AN APPEAL with your insurance company. Keep filing an appeal until it reaches an impartial party. All of the insurance companies I've done businss with required an appeal process that included a final appeal to a party that was not employed by the insurance company except as a contractor. By not having face-to-face contact with the insurance company, the contractor could be more objective.
Also each state has a board that regulates its insurance companies. If you feel this company has violated your policy, then file a complaint. If you are unsure, then contact your state's regulatory office and request to speak to someone. They may go a long way in answering your questions about how to resolve this.
Finally, I would definitely speak with an account representative at the hospital. If they seem unfriendly or not knowledgeable about the subject, then don't proceed any further. Many times, however, patients are billed because no one manually adjusted the account to accomodate pre-payment. It may simply be that a computer keeps spitting out this bill because no one has told it to stop sending it to you.  
I was a CEO of a health insurance company for years and have faced this question many times. The answer is yes in most States. In fact, in 17 years of experience around the country I never found one State where it was not legal. But that does not mean it is legal in your State. And whether it is legal or not does not mean that it is right. I would check with your State Insurance Commissioner's office and also your State Attorney General's office. (By the way, I left the industy with the attitude that what was once a good industry has become nothing but a greedy enterprise. I wish you the best of luck.)
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